Gap – Technical Analysis Tutorial – Gap-Up & Gap-Down

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The gap is a price zone where no trading took place. It is a gap that can be identified by looking at price trends from a graphical point of view.

 

From a theoretical point of view, the gaps can be of two types:

Gap-up

GapUp occurs when prices open above the previous day’s maximum, creating a gap in prices (gap-up) that is no longer filled; since then, the daily minimum stays above the previous day’s maximum.

 

The distance between today’s minimum and the previous day’s maximum is the gap-up zone.

Gap-Down

GapDown occurs when prices open below the minimum of the previous day, creating a gap in prices (gap-down) that is no longer filled, since then the maximum daily stays below the minimum of the previous day.

 

The distance between today’s maximum and the previous day’s minimum is the GapDown zone.

Gaps occur very often for the dissemination of important economic/financial news: if the news is positive, an upward gap-up can immediately happen at the opening, but if the news is negative, there can quickly be a gap-down at the opening.

Gaps should not be confused with laps: these express the distance between the closing price of the previous day and the opening of the next day.

There is, therefore, a lap-up when the market opens above the closing price of the previous day and a lap-down when the market opens below the closing price of the previous day.

 

Gaps are critical, as they make it possible to assess the technical structure of the financial activity under analysis.

 

In particular, we can identify three types of gap:

Breakaway

It is the most crucial gap and can be:

Rialzista: it is the gap that signals the beginning of an upward trend. It is a significant gap, as it very often causes the breakdown of a stable level of static resistance: the upward breakout occurs with very high volumes, confirming that the buyers’ strength has taken over. A positive primary trend has established itself on the market.

Ribassista: it is the gap that signals the beginning of a downward trend. It is a significant gap, as it very often causes the breakdown of a stable level of static support: the downward breakout occurs with very high volumes, confirming that the strength of the sellers has taken over. A negative primary trend has established itself on the market.

Runaway

It is the typical gap that occurs during the development of a robust movement and confirms that the positive/negative trend followed by prices remains solid.

It is not very large, but very often pushes prices to new relative highs/lows.

 

Exhaustion

It is the gap that occurs at the end of a primary trend and can be identified both for the large size and for the high volumes that develop during the day.

The exhaustion gap very often causes a reversal of the trend.

 

Gap-up Gap-down

 

 

If it occurs at the end of an upward movement, it indicates that prices have reached a significant peak.

Once this maximum is reached, buyers reduce their intensity, while sellers take advantage of the latter to liquidate their positions and possibly to open new short positions.

 

If it occurs at the end of a downward movement, it indicates that prices have reached a significant minimum.

Once this minimum is reached, sellers reduce their intensity, while buyers take advantage of the latter to open up new long positions.

 

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Wikipedia

 

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My name is Luca. I grew up in Italy. I have a degree in law and I’m an independent trader since 2007. I’m a systematic trader and sometimes, I trade using options strategies with US ETFs and Stocks.I have built hundreds of automated trading systems and indicators for TradeStation, MultiCharts and MetaTrader.I started this blog in 2017 to share what I learned in the financial market.

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