What Is A Common Gap Chart Pattern?
A common gap, also known as an "area gap", is when a price gap forms on a price chart of a financial market. The common gap forms when the opening price of a market is higher or lower than the prior closing price.
A common gap can occur regularly in a market. It can form as part of normal trading activity without any catalyst or event causing the gap.
A common gap is generally a small gap up or down in the market with little volume and the common gap tends to get filled quickly, usually in under a week.
It typically forms within a trading range rather than during a trend. This is what distinguishes the common gap from other types of gaps.
Types Of Common Gap Chart Patterns
There are two types of continuation gap patterns. The two types of continuation gap patterns are:
- Bullish common gap: A bullish common gap is when the price of a market makes a small gap down on low volume and then the price reverses up to fill in the gap down.
- Bearish common gap: A bearish common gap is when the price of a market makes a small gap up on low volume and then the price reverses lower to fill in the gap up.
Common Gap Pattern Components
In order to identify a common gap pattern on a price chart, there will need to be certain components visible.
The components of a common gap pattern are:
- A sideways/consolidating market: The market will need to be in a consolidation period with the prices moving sideways within a trading range.
- A small price gap up/gap down within the consolidation range: The price of the market should gap up or down but stay within a price range. The size of how small a gap should be is subjective but typically no more than 2-4% is ideal.
- Little to no volume on the gap up/gap down: There will need to be little volume on the gap up or gap down. This signals that there aren't major market participants as the market gaps in price.
Common Gap Chart Pattern Examples
Below are visual examples of the common gap chart pattern.
Example Of A Bullish Common Gap Pattern
On the price chart of United States Steel Corporation stock above, a bullish common gap formed (marked with the red arrow).
The price of the stock gapped down within a price range. The price reversed to bullish and quickly filled in the price gap caused by the gap down.
Example Of A Bearish Common Gap Pattern
On the price chart of Ford stock, a bearish common gap formed. The price of Ford gapped up but stayed within a price range.
The price reversed lower and filled the gap the very next day.
Example Of A Common Gap Pattern In The Stock Market
On the price chart of the Nasdaq 100 Index above, a common gap formed. The price gapped up but stayed within a price range.
The price quickly reversed and filled in the gap within three trading days.
How To Find Common Gap Chart Patterns
The methods for finding a common gap pattern in the market are:
- Use a premarket or gap up/gap down scanner: Use a free market scanner to find markets gapping up or gapping down.
- Manually browse through the price charts of markets: A trader can manually browse through the price charts of markets to find common gaps forming.
Common Gap Chart Pattern Benefits
The benefits of the common gap pattern are:
- It can indicate for a trader to stay out of the market: A common gap pattern can help a trader to understand that the market environment is choppy and not ideal for trading in.
- It is simple to learn: Learning what a common gap pattern looks like is easy. It is merely finding prices gapping up or down a small amount and staying within a range.
- It is easy to scan for: A trader can easily set scans to find these patterns in the market.
Common Gap Chart Pattern Limitations
The limitations of the common gap pattern are:
- There is no clear trading signal: A common gap does not offer any trading signal. Instead, it illustrates that the market is still choppy and volatile.
- It can be hard to spot on a price chart: As a common gap is generally a small gap between the prices, traders can sometimes find it difficult to spot them on a price chart.
Frequently Asked Questions About Common Gap Chart Patterns
Below are frequently asked questions about the common gap chart pattern.
Is A Common Gap A Continuation Or Reversal Pattern?
A common gap tends to be a reversal pattern meaning after the price of a market gaps up or down, it tends to fill that gap relatively quickly, usually after a couple of days at most.
What Does A Common Gap Pattern Tell You?
A common gap tells a trader that the market price action is choppy and there is no clear direction of the trend in a market.
Can A Common Gap Be Found On A Line Price Chart?
No, a common gap pattern can not be found on a line chart as a line chart does not show gaps in the prices. Instead, a line chart connects the prices with lines.
What Is The Difference Between A Common Gap And A Continuation Gap?
The differences between a common gap pattern and a continuation gap pattern are:
- Where it forms: A common gap can form during normal price action periods whereas a continuation gap can only form during a bullish or bearish price trend in the market.
- What it signals: A common gap pattern can signals either a continuation in the gap up or a reversal whereas a continuation gap pattern can only signal a continuation in the price of a market.