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The Types Of Gaps You Can Use In Your Trading Strategies

By Jun M Diel

Using Gap in trading strategies is perceived as a simple and organized method in buying and shorting stocks. This process involves a trader spotting a price gap that occurred from the prior close and then monitors the initial trading hour in order to define the trading range. Exceeding that range indicates a buy and dropping below that range can indicate a short.

Basically, a gap is defined as an area on the chart that indicates no occurrence of a trading activity. In the daily chart, a gap occurs when the stock ends at a certain price yet starts the following day at a diverse price.

Usually technical analysis books present four types of gap patterns known as Common, Breakaway, Exhaustion and Runaway gap. These types are usually used after the establishment of the chart pattern.

1. Common Gap:

Common Gap, also known as temporary, pattern or area gap, is the type of gap that transpires most frequently. It can transpire in both upside and downside and even daily.

2. Breakaway Gap

This is the type of gap that transpires when prices separate from the congestion area. Unlike common gaps, breakaway gaps transpire after and not during the stage of congestion when prices progress is in a slim and defined range. Breakaway gaps generally mark the initial phase of the defined trend.

Prices in this type of gap tend to separate from their defined trading range. In this type of gap, whether it is buyers or sellers, a side of the market can rise above the other and then begins the initialization of the defined price trend.

3. Exhaustion gap

This type of gap indicates the ending stage of a move. It indicates that a trend has exhausted its steam as well as the initialization of a major reversal. After this gap, there will be no occurrence of new highs or lows.

4. Measuring Gap

Measuring or runaway gap is shaped in the middle stages of the price move. This gap occurs in the time the trend of a stock or commodity is strong and defined. These trends have price spikes that are either upward or downward and are usually a result from the willingness of additional traders to join the current trend. Traders who were not able to join the trend's initial move are making an effort to get in. This activity amplifies the trend thus resulting in runaway gaps.

Using a set of well-organized entry and exit guidelines in order to minimize risk and signal trades can enhance the success of your gap trading strategies. Longer-term investors should learn how gaps work especially when "short" signals can be utilized as the exit signal to sell holdings.

Jun Diel Is an avid trader of gold and silver. He wants you to visit Derivative Trading Systems and learn how they can help you attain real time market updates as well as analytic tools and display for better assessment of trading strategies.