Price Gaps: Types, Causes, and How to Analyze and Trade Them

In financial markets like stocks and forex, a "gap" occurs when there is a significant price difference between the opening price of one trading session and the closing price of the previous session, with no trades in between. On candlestick charts, this appears as a noticeable blank space, visually highlighting a sudden price shift. Gaps are critical in chart analysis as they often signal significant market sentiment changes or reactions to major events.

What Is a Price Gap?

A price gap, commonly referred to simply as a gap, is a distinct blank space on a candlestick chart that occurs when the price of an asset suddenly jumps between consecutive trading sessions without any trades occurring in between.

This phenomenon highlights a significant price movement and is typically caused by major market events, such as breaking news, the release of economic data, corporate earnings reports, or other factors that drastically shift market sentiment and asset valuation.

Price gaps reveal a sharp change in the balance of power between buyers and sellers at a specific moment in time. They are closely monitored by market participants as they often signal shifts in market sentiment and can act as key indicators of potential future price trends.

Price Gaps Categorized by Direction

Price gaps can be classified into two types based on their direction:

• Gap Up: Indicates a breakout with prices opening significantly higher than the previous close.
• Gap Down: Indicates a breakout with prices opening significantly lower than the previous close.

Price Gaps Categorized by Technical Analysis

In technical analysis, price gaps can be classified into four main types, each with unique market implications and trading signals:

1.Common Gap
2.Breakaway Gap
3.Runaway Gap
4.Exhaustion Gap

1. Common Gap

Common gaps occur due to random market fluctuations and do not indicate any specific trend.

• These gaps can happen at any time and are often quickly filled by subsequent price movements.
• They are generally not considered significant market signals.

2. Breakaway Gap

Breakaway gaps occur when prices break through a key support or resistance level, signaling the start of a new trend.

• These gaps reflect a strong shift in market sentiment and are less likely to be quickly filled.
• They often mark the beginning of a major price movement.

3. Runaway Gap

Also known as an Acceleration Gap, a runaway gap occurs during a well-established trend, indicating momentum is accelerating.

• This type of gap suggests the current trend will likely continue.
• It typically forms in the middle of a price movement, confirming strong market dynamics.

4. Exhaustion Gap

Also referred to as a Terminal Gap, an exhaustion gap appears near the end of a trend, signaling that the momentum driving the trend has weakened.

• These gaps often precede a market reversal or a significant correction.
• They serve as an early warning of potential trend exhaustion.