The gaps are created in the candlestick chart when the stock opens significantly up/down from previous day’s closing price, creating a gap between two candles. The gap analysis helps identify the strength of a trend. There are 4 types of gaps,
1. Area gap – created within the non-trending zone. It’s usually filled quickly and is in-significant from the trading perspective.
2. Breakout gap – created when stock breaks out from non-trending zone and starts a new up/down trend. This is associated with high volume and should be treated as start of new trend.
3. Runaway gap – created when stock is already in the trend and indicates strength of the trend.
4. Exhaustion gap – creates when the stock opens with a gap, but the gap is filled within the session. This indicates trend is weakening and possibly coming to an end.