Chart Patterns
Gaps
Gaps appear in charts when there is no trading at certain price levels between bars. Specifically this will occur when the low of a day is higher than the high of the previous day or when the high of a day is lower than the low of the previous day.
This is evident in the chart above where the low of the bar with the red oval is higher than the high of the previous bar therefore creating the appearance of a physical gap in the price plot. In the chart below, you have an example of a gap down. The high of the lower bar within the blue oval is much lower than the low of the previous bar towards the top of the oval.
Gaps normally occur within established trends and indicate that the sentiment of the market is changing quickly. This will occur overnight when the general consensus of a security’s price will change significantly and the majority of at limit orders will be placed a distance away from the previous close.There are a number of different types of gaps which include breakaway, continuation and exhaustion gaps. Breakaway gaps will occur after a security has been congesting in a narrow trading range as depicted in the chart below.
In this example, the security formed a congestion period as it traded in a narrow trading range and then gapped up breaking out. Exhaustion gaps occur towards the end of trends and are normally associated with light volume. They are also very quickly closed which means the gap created in the chart is quickly traded through by the security reversing. An example of this is shown in the chart below.
Whilst gaps provide some useful analysis for traders, caution should be taken when doing so.There are occasionally legitimate reasons why charts will have gaps in them. On the first day of a security trading ex-dividend it is perfectly normal for it to gap down on the open of the day’s trading from the previous day’s close. Other occasions will be when there has been an adjustment to the capital base and a change in the number of fully paid ordinary shares on issue. Some diligent data providers will ensure that the historical data is adjusted to reflect the new price and that there is no evident gap however this is not always the case.
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