Chart pattern: gap

A gap in a chart is basically an empty space between a trading period and the one before that trading period. They normally occur due to an important and material event that will affect the security, like an earnings surprise or a merger agreement. This will happen when there is a large enough distinction in the opening price of a trading period where the price and the subsequent price moving do not fall within the range of the previous trading period. For example, if a particular price of a company’s stock is trading near $40 and then the next trading period opens at $45, there should be a large gap at the top of the chart between the two periods, as indicated below. The gap price activity can be found on bar charts and candlestick charts but will not be found on point-and-figure or basic line charts. The reasoning behind this is that every point on both point-and-figure charts and line charts are connected. It is said that when referring to gaps that they will always fill, meaning that the price will move back and cover at least the empty trading range. Still before entering a trade that earns the cover, keep in mind that this doesn’t always happen and can sometimes take some time to fill. The four main types of gaps are: regular, breakaway, runaway (measuring) and exhaustion. Each has the same structure and differs only in its place in the trend and subsequent importance to chartists.

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