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MARKET GAPS - Short and Simple explanation

Education
NSE:NIFTY   Nifty 50 Index
GAPS are areas on the chart where no trading activity took place. In an uptrend, for example, When the opening price is higher than the highest price of a previous day, leaving a blank space on the chart, it will be called a GAP-Up opening. Likewise, in a GAP-DOWN situation, the opening price will be lower than the previous day's lowest traded price. Now we will go through different types of gaps, how to identify them, and what they may signal.

TYPES OF GAPS :
  • NORMAL GAP: From the name itself, it's a fairly common type of GAP. Such common gaps are made with lower volume and can be spotted frequently on hourly/ daily charts . 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.

  • BREAKAWAY GAP: Breakaway gap occurs after forming patterns (Triangles, Wedges , etc) or breaking major trendlines signally a possible trend reversal. This gap is formed with heavy volume signaling a significant market movement. Consider this: If an Ascending triangle pattern formation is spotted and there is a break with high volume forming a gap, it's a sign of an uptrend.

  • 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 volume . This is also known as measuring gaps because they generally occur at about halfway in a trend.

  • 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.

TIPS :
  • 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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Comments

Nicely explained - Thanks.
+1 Reply
pranaytrades praveens810
@praveens810, Thank you!
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