TYPES OF GAPS :
1) NORMAL GAP: From the name itself, it's a fairly common type of GAP. Such common gaps are made with lower and can be spotted frequently on hourly/ . Common gaps are most likely to be filled. Such gaps can be used strategically to plan entries.
For example, when the market made this gap (Referring to nifty chart), I was certain that it will be filled, and as soon as the market touched line L1, I took a CALL position hoping that market will bounce back after filling this gap.
2) BREAKAWAY GAP: Breakaway gap occurs after forming patterns (Triangles, , etc) or breaking major signally a possible trend reversal. This gap is formed with heavy signaling a significant market movement. Consider this: If an pattern formation is spotted and there is a break with high forming a gap, it's a sign of an uptrend.
3) RUNAWAY/MEASURING GAP: This type of gap occurs when the market is in a particular trend for a while. Runaway / Measuring gaps signals a strong momentum in a trend. Say, the market is in an Uptrend, and a runaway gap occurs, this means the market is strong and will continue the upward movement. In an uptrend, it signals Strength, whereas, in a downtrend, it signals weakness in the market. This type of gap occurs with moderate . This is also known as measuring gaps because they generally occur at about halfway in a trend.
4) EXAUSATION GAP: This last type of gap can be spotted at an end of a move. This gap is quickly filled and signals a reversal. For example, the market is moving in an uptrend and an upward gap appears that fails to sustain and slowly fades away. This signals weakness in the uptrend and a trend reversal may happen shortly. Prices closing under the gap will signal that an exhaustion gap has been formed. This type of gap indicates a state of panic in the market.
- Volume is an important factor while identifying gaps.
- It is important to include other indicators/patterns to confirm the movement while trading gaps.
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