Educational post ! GAPS & chart:
[i]text from Lowtrade's board.
Why do gaps need to be filled?
Gaps don't need to fill, they normally do!
You have to think about what causes the gaps in price!
Emotion ! That's why you often see the term emotion gap, in books. When some news event or big guy manipulation happens, the price swings to extreme, leaving gaps in the candle pattern from the previous day close, to the next mornings open.
There are 4 types of gaps,
Common Gaps
Breakaway Gaps
Runaway Gaps
Exhaustion Gaps
Keep one thing in mind! I want to stress, my opinion on what a gap pattern looks like.
A gap is seen when the day before's close price, is lower then the next mornings open price! or vice versa (the candle body only) If you look at your trade screen, & list the previous days close & new days open, you'll note PREV&OPEN PPs, they are the numbers!
Many look at the candle chart and see the candle spikes lines touching the day before's EOD PPS or the day before's candle, has a top tail, reaching the next mornings open PPs.
Because the tales seem to cover the gap, many say there is not a gap! WRONG!!! The spike tail, could have happened any time during the day. And the candle body is the actual final or first Price in each days trading. Only use candle body.
Daily SPIKE TAILS don't count!
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I say 90% of all gaps fill, others may say 80% or 75% or 98%. I have no way to prove this, and double anyone can! Just let it be a concessions, that gaps fill most all the time! So they are reasonably low risk trades.
Now back to the 4 types;
Common are always closed.
They occur with a one day pop, usually, and the lack of a second day continuation, shows why they fill! There is NO real emotion.
Breakaway are usually closed over time. You see them in a multi-day emotion run or walk-down, where the stock price is fluxing around over several months. (trending or channeling) They normally occur during chart pattern moves. (like triangles, double bottoms & the like) And the following retail mindset returns to logic, and fills the gap with the retrace.
Runaway are often the "few" that don't fill. Or if they do, it takes so long for them to fill, you don't look back that far to see the gap fill at all! LOL The difference with these and Breakaway gaps are, these are seen in climbing stock patterns, not fluxing. Retail is continuously positive or negative in a climb or walk-down. And a huge one day emotion spike doesn't warrant a price correction, because the mindset changed completely! Basically every thing just continues, lower!
Exhaustion Gaps are rarely seen. They happen at the end of a move. And show the retail mindset has reached a enough is enough point.
Worriers have been expecting a turn too long, they have a concerned trigger finger, creating a rush out the door on the first sign of any weakness, and sell momo takes over. The next day others, which weren't worried, see this and can't decide to agree or not. The PPS swings large. Then everyone just gives up.
So, to recap;
MOST all gaps fill. They are caused by retail emotion and when emotion leaves, the long share holders, bring the stock price back to a reasonable, average new price level.
If you see a gap; expect the price to come back & correct the emotion!
Common, Breakaway, & Exhaustion gaps
Are the ones that fill most of the time.
Runaway gaps rarely fill, over a short period of time, may take months to a year or more and should not be played.
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