What Is A Gap Chart Pattern?
In technical analysis, a gap pattern occurs on a price chart of a market when the price of a market significantly increases or decreases in price with no trading in between the increase or decrease in the price.
Usually, a gap pattern forms between the close of the market and the opening of the market the next day with there being a difference between the closing price and the opening price the next day.
Gaps can form in two directions. A gap up indicates the price gapped higher in prices and a gap down indicates the price of a market gapped down lower in prices.
A gap up or gap down on a price chart will look like an area of blank space on a chart where the price never traded at.
Types Of Gap Chart Patterns
There are 4 different types of gap chart patterns that form on the price charts of financial markets. These gap patterns are named based on when they occur
The 4 types of gap chart patterns are:
- Common Gap: Common gaps are gaps that occurred randomly on a price chart without any trends or breakouts before them. As the name suggests, they are common, especially in the stock market.
- Exhaustion Gaps: Exhaustion gaps are gaps that lead to exhaustion in the price of a market and they can signal a price reversal. An exhaustion gap can form during a gap up or gap down and typically forms at market tops and market bottoms or at the end of a trend.
- Breakaway Gaps: Breakaway gaps are gaps that form on the price chart at a breakout level of a resistance level or support level. It usually occurs as a breakout from a consolidation period or congested price action and can be either a gap up or a gap down. It typically signals the beginning of a new price trend.
- Continuation Gaps: Continuation gaps are gaps that occur in the middle of an already established trend. It signals that the price will continue in the direction of the trend after the gap up/down.
Gap Chart Pattern Examples
Below are visual examples of the gap chart pattern.
Example Of A Common Gap
On the price chart of Microsoft stock, a common gap formed. This gap formed randomly on the price chart with no previous trend or no previous consolidation period.
This is also an example of a gap up in the market.
Example Of An Exhaustion Gap Pattern
In the price chart of Apple stock above, an exhaustion gap formed. This indicated a reversal at the end of the bullish trend and the price reversed from bullish to bearish.
Example Of A Breakaway Gap Pattern
On the price chart of Chewy stock above, a breakaway gap pattern formed. A breakaway gap forms when the price gaps up/down from a pattern and it indicates the beginning of a new trend.
In the chart above, the price breaks out from the previous rising channel and a new bearish trend begins.
This is also an example of a gap down in the markets.
Example Of A Continuation Gap Pattern
On the price chart of Apple above, a continuation gap pattern formed. The price of Apple stock was in a bullish trend. It gapped up and continued to move even higher.
A continuation gap signals that the price gapped up and continued in the direction of the trend.
How To Find Gap Chart Patterns
The methods for finding a gap pattern in the market are:
- Use a premarket percentage mover scanner: Use a premarket scanner to filter for markets that have moved up or down a large percentage pre-market. This will indicate markets that are gapping up or down big.
- Manually scan the price charts for price gaps: A trader can manually browse through price charts to find gaps. This is time-consuming and with free alternatives, it is not the most popular method for finding gaps.
Gap Chart Pattern Causes
There are a number of factors that causes a gap chart pattern to form on the price charts of a market.
The causes of gaps on the price charts of financial markets include:
- Important news announcements: Important news announcements like earnings releases, FOMC speaking, etc. can cause the price of a market to gap up or down.
- Overnight economic or political events: If there is price volatility overnight as a result of an economic or political event, this can cause the price of a market to gap up or down.
- Lack of liquidity: If there are no bids or offers at certain prices or there is a general lack of liquidity, this can cause the price of a market to gap up or gap down to prices where there is liquidity.
Gap Chart Pattern Benefits
The benefits of the gap pattern are:
- It can signal the beginning of a new trend: A gap can signal the beginning of a new price trend in the market meaning traders can try to capture the trend from its early stages.
- It can help avoid trading in sideways markets: A gap pattern can help a trader wait for potential trending markets and avoid choppy and sideways price action.
- It is easy to spot: A gap is a simple chart pattern to spot where new traders can easily identify when a price is gapping up or gapping down.
Gap Chart Pattern Limitations
The limitations of the gap chart pattern are:
- It can be confusing as to what direction that market will move: A gap may result in a trending market or a reversal in prices post the gap up/down and this can cause confusion.
- It can lead to higher volatility: A gap in the price can lead to an increase in volatility in a market. This can make it harder to manage risk.
Frequently Asked Questions About Gap Chart Patterns
Below are frequently asked questions about the gap chart pattern.
Is A Gap Pattern Bullish Or Bearish?
A gap chart pattern can be either bullish or bearish depending on how the price moves after the gap.
If the price gaps up and moves higher, this is a bullish signal. If the price gaps down and moves lower, this is a bearish signal.
Is A Gap Chart Pattern A Continuation Or Reversal Pattern?
A gap pattern can be either a reversal or a continuation pattern depending on how the price moves post the gap up/down.
When the price gaps up/down and continues to move in the same direction as the gap, it's known as a continuation gap.
When the price gaps and reverses in the opposite direction of the gap, it's known as a reversal gap.
What Timeframe Of Price Charts Can A Gap Chart Pattern Form On?
A gap chart pattern can form on a daily, weekly and monthly price charts. The most common timeframe for price gaps to form is the daily price charts.
What Does Fill The Gap Mean?
Fill the gap is a term used in trading that indicates that the price of a market has filled in the gap between the previous closing price and the gap price.
For example, if the price of a market gapped up from a previous day's closing price, filling in the gap would mean the price of the market traded back lower to the previous closing price before the gap up occurred.