When analyzing the graph of the share price, it seems to describe a continuous line; although jumps are suddenly observed, why are they?
What is a gap?
This name is known as the gap in the price of an asset. It is a 'jump' caused by a sudden change in price, thereby losing continuity on the candlestick chart.
This movement appears more frequently at the opening, although depending on the horizon of the candles, it can also be observed during or at the close of the session.
These types of jumps can appear after bullish or bearish movements. A gap allows us to analyze the strength with which a trend develops.
How to use them in trading?
To take advantage of them, you must know this concept: 'fill the gap.'
This movement occurs when the price maintains the momentum (up or down) after the' jump' occurs. Then a correction occurs that ends up resting on the bottom of the gap. If it does not break, it is usually a positive signal of the trend that resumes; otherwise, if it exceeds.
Some claim that all gaps eventually close. Although many cases support it, there are others that so far seem to deny it. The truth is that regardless, they are handy for our trading strategies.
This image will help you better understand this concept:
Types of gaps
On the other hand, there are several types of gaps that you should pay attention to:
Breakaway gap: It is a breakout gap, both up and down; these show high transaction volumes; they are identified by the breakdown of important support or resistance, thereby marking the trend to continue.
Runaway gap: these gaps confirm the trend (bearish or bullish), appear in the middle of the trend and can be used as an entry or exit point.
Exhaustion gap: This figure indicates the end of a trend near a support or resistance. Once filled, it can indicate a turn of the trend in which the price is.
Source: https://dotbig.com/markets/forex/
In conclusion
Once you can identify a gap, try to see the factors behind it to increase your chances of success. Always remember to manage your risk and try to limit your losses diligently.
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