In terms of spotting profitable patterns, an empty space can say a lot about a trend's direction. Gaps are easy to spot and analyze. But just because they're easy to pinpoint, don't think they aren't valuable.
Gaps are simply price ranges on a chart where no actual trading has taken place. They form when prices open higher or lower than the previous day's range. All gaps are not the same. To become a knowledgeable trader, you must be able to distinguish among four different types of gaps.
is the least important of all gaps because it is assumed to have no special meaning. It can occur in thinly traded markets or it can be found in the midst of a sideways channel. Prices return to fill common gaps, usually within a few days.
often occurs at the end of a sideways consolidation pattern. It signals the beginning of a significant price move, which may be very dynamic. Breakaway gaps are normally not filled for several weeks or months. As a rule of thumb, the greater the volume of a breakaway gap, the less likely prices will retract and fill.
Breakaway gaps that occur at the upper end of the channel are referred to as upside gaps. When the market corrects and comes down in price, these gaps can act as support areas. Conversely, downside gaps can act as resistance areas when prices move up after a downward move.
, occur after a trend is already established. They are significant because they generally mark the midpoint of a move. You might say that the market is moving effortlessly, and that is the reason for jumps in price. Measuring gaps can also act as support and resistance areas when price corrections occur in a major trend.
Finally, as the name suggests, an
occurs during the final stages of a move. It usually happens within a couple days of a climax or bottom. An exhaustion gap reflects a market that simply runs out of steam. When prices close under this last gap, it usually forecasts the start of a sideways pattern or a reversal of the prior major trend.
Professional traders understand the importance of gaps and how to use them in their analysis. Knowing how to use gaps can give you an edge in your trading as well.
By Jeff Neal, contributing writer and options strategist at
Optionetics.com. Email him at