A gap is an area discontinuity in a security’s chart where its price either rises or falls from the previous day’s close with no trading occurring in between. There are four different types of gaps – Common Gaps, Breakaway Gaps, Runaway Gaps, and Exhaustion Gaps – each with its own signal to traders.
Area gap or common gap- Common gaps generally get filled relatively quickly (usually within a couple of days) when compared to other types of gaps. Common gaps are also known as “area gaps” or “trading gaps” and tend to be accompanied by normal average trading volume.
Breakout gap- A breakaway gap occurs when the price gaps above a support or resistance area, like those established during a trading range. When the price breaks out of a well-established trading range via a gap, that is a breakaway gap.
Runaway gap- A runaway gap occurs when trading activity skips sequential price points, usually driven by intense investor interest. In other words, there was no trading, defined as an exchange of ownership in security, between the price point where the runaway gap began and where it ended.
Exhaustion gap- An exhaustion gap is marked by a break lower in prices (usually on a daily chart) that occurs after a rapid rise in a stock’s price over several weeks prior.
