|
Written by and copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved.
|
Closed Gap and Gap
|
|
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 362 to 373. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
Gaps are useful for showing support or resistance zones but as a tradeable, by the time you
properly identify them, the move is nearly over. If you already own a stock and a chart pattern breaks out in a gap,
then hold on for a strong move. Performance improves two-thirds of the time in the chart patterns I looked at.
Important Bull Market Results for Gaps
Percentage of gaps closing within a week, upward breakouts:
Area gaps: 89%
Breakaway gaps: 2%
Continuation gaps: 4%
Exhaustion gaps: 61%
Percentage of gaps closing within a week, downward breakouts:
Area gaps: 92%
Breakaway gaps: 1%
Continuation gaps: 9%
Exhaustion gaps: 64%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
|
|
Gap Identification Guidelines
Gaps occur when today's high is below yesterday's
low (bearish gap), or today's low is above yesterday's high (bullish
gap).
| Gap Type | Discussion |
| Area, common or pattern gaps | Occurs in congestion (trendless markets) and closes quickly,
usually in a few days. Volume on the gap day may be high but returns to normal in a day or two. No new highs (upward trends)
or lows (downward trends) occur after the gap. A distinctive price curl as the gap closes quickly is a clue to this gap type. |
| Breakaway gaps | Starts a new trend and the gap often occurs on leaving
a consolidation area, usually on high volume on the gap day, which can continue for several days. Price trends for several
days. |
| Continuation, measuring, or runaway gaps | Gap occurs during a straight-line advance or decline. Price
makes new highs or lows without closing the gap. Volume is usually high. |
| Ex-dividend gaps | Caused by a dividend distribution. Price moves down by
the amount of the dividend and a gap appears but it's usually closed by the end of the trading day. |
| Exhaustion gaps | Happens at the end of a trend on high volume. The gap is
not followed by new highs or lows, and the gap may be unusually wide. After the gap, price consolidates or reverses direction.
Commonly occurs after continuation gaps. Exhaustion gaps usually close within a week. |
Gap Trading Tips
| Gap Type | Explanation |
| Area, common or pattern gaps | These close too quickly to be of trading significance. |
| Breakaway gaps | Look for a high volume gap and trade in the direction of
the trend. The best performance comes from breakaway gaps in a bull market near the yearly high. In a bear market, trade those
near the yearly low. Large breakaway gaps outperform small ones. |
| Continuation, measuring, or runaway gaps | On a time basis, usually marks the halfway point in an
upward price move. By price, the gap appears 43% of the way from trend start to gap center. For downward breakouts, the gap
appears 69% of the way on a time basis, and 57% on a price basis. Measure from the swing low or high to the gap center and
project from the gap center to the predicted high or low. |
| Ex-dividend gaps | These close too quickly to be of trading significance. |
| Exhaustion gaps | If an unusually wide gap occurs, it may mark the end of
the trend (immediately or within a few days). Violent reversals can follow an exhaustion gap, so consider taking a position
in the new direction. |
| Stop loss | Gaps are places of price support or resistance, so they
make for good stop locations. Place a stop a few cents below the gap (upward breakouts) or above the gap (downward breakouts). |
Average Time to Close the Gaps (bull market)
Closing the gap means price rises/declines to fill the gap, covering the opening. See the chart near the top of this page for an example of a closed gap.
| Trading Tactic | Explanation |
| Area, common or pattern gaps | 3 days for both breakout directions |
| Breakaway gaps | 136 days for upward breakouts, 168 days for downward breakouts. |
| Continuation, measuring, or runaway gaps | 98 days for upward breakouts, 77 days for downward breakouts. |
| Exhaustion gaps | 9 days for upward breakouts, 14 days for downward breakouts. |
Tip: gaps that occur on the day of a chart pattern breakout
suggest a better performing chart pattern two out of three times, regardless of the breakout direction.
Gap Example
The above figure shows examples of various gap types. Breakaway gaps exit from congestion areas. Area gaps close
quickly. Exhaustion gaps appear at the end of a trend. Continuation gaps show in the middle of trends.
-- Thomas Bulkowski
Other Gap Examples
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. Computers are not intelligent. They only think they are.
|
. If you buy ANYTHING, they pay for the referral.
on 