Gap analysis helps you to identify the strength of the market trend. The Dow theory, price patterns and candlestick analysis tell you the price trend and the characteristic of the trend but it does not exactly tell about the strength of the market movement. If price is falling down, you do not know, if it is due to the aggressive selling or lackluster buying or just profit booking. The Gap analysis will also help you understand the current phase of the trend. Whether the trend is at its beginning or about to end.
Naming the cap is the most important thing. If you know the name the gap correctly, you are through with 90% of gap analysis.
A Gap will appear if there is a remarkable difference between the closing price of one day and the opening price of the subsequent day. Say, if the price ranged between 20 to 30 today and the next day, it opens at 40, that shows a gap.
You cannot spot a gap in a line chart as it connects all the closing price. You should use candlesticks to identify gaps.
Trending area in a graph is an area where the price is going up or down. This indicates the strength of buyer or seller based on the direction. Non-trending area is where the price is moving sideways and indicates both the buyers and sellers are equally strong.
