Understanding the 4 Types of Gaps in Trading: A Comprehensive Guide
Learn about the 4 types of gaps in trading and how to use them for better trading strategies.
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1. Common Gap: Arises in a normal price pattern. 2. Breakaway Gap: Occurs when price breaks away from an established pattern. 3. Runaway Gap: Shows strong price movement in the current trend. 4. Exhaustion Gap: Indicates a potential trend reversal. Understanding these gaps aids in making informed trading decisions.
FAQs & Answers
- What is a Common Gap in trading? A Common Gap arises in a normal price pattern and typically occurs during periods of low volatility. It often fills quickly, indicating little significance in major trend changes.
- How does a Breakaway Gap differ from other gaps? A Breakaway Gap occurs when the price breaks away from an established price pattern, signaling the beginning of a strong price move in the direction of the break. It usually happens at the breakout of a resistance or support level.
- What does a Runaway Gap indicate in the market? A Runaway Gap suggests strong momentum in an existing trend, indicating that the price movement is likely to continue in the same direction. It often occurs during significant price moves.
- What is an Exhaustion Gap and what does it signal? An Exhaustion Gap indicates a potential trend reversal, often signaling that a trend is losing momentum. It typically appears at the end of a price trend, warning traders to be cautious about their positions.