What are Price Gaps?
Lets understand concept of Price Gaps with example. You may have seen Nifty or any stock opening at price above the previous day close. For example if Nifty closed at 10,000 yesterday it may open at 10,050 today.
During the day trade it may not go below 10,050. On following days it may trade above this point. So Nifty may not trade between prices 10,000 and 10,050. This gap of 50 points in which Nifty have not traded during the movement is called Price Gap.
Price Gaps are common both in uptrend and downtrend. In case you want more information about trends then read my chapter on Types of trends. You may also consider looking at technical analysis guide for list of all chapters in sequence.
Price Gaps are important in Technical Analysis. If price gaps occur in Uptrend or Downtrend then they show strength of the trend. Based on the place of occurrence there are different types of Gaps and the interpretation changes as well.
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Types of Price Gap
There are three types of Price Gaps. I will discuss each of them in some details.
- Breakaway Gap
- Runaway Gap (Measuring Gap)
- Exhaustion Gap
As per the price gap theory there are three types of Gap created in any uptrend or downtrend. The gaps are mentioned in order of occurrence. that is Breakaway happens first , then Runaway gap and at last exhaustion gap.
Breakaway Gap
Breakaway Gap occurs with heavy volume. It signifies breaking of resistance point in an uptrend and breaking of support point in a downtrend. They generally occur after consolidation. So stock prices after consolidation breaks the resistance with huge volume signalling uptrend start. Same is the case for downtrend as well.
Runaway Gap
Runaway Gap is also known as measuring gap. Breakaway gap marks start of a trend in general. Runaway Gap measures the strength of the trend. This is the reason why it is also called Measuring Gap as well. It measures strength of a trend.
Generally it occurs during an uptrend or downtrend. It is located in midway of the trend and shows the strength of it. The volume may not be above average. So volume is not major criteria in this price gap.
Exhaustion Gap
This is the last price gap created in an uptrend and downtrend. The prices make one more gap. After creating the gap price consolidates for few trading session and then breaks below the gap. This marks end of the trend and trend reversal happens.
It happens at end of uptrend and downtrend marking end of the trend. So after exhaustion gap you should become alert and know for sure that prices will reverse.
Conclusion
I wanted to keep this chapter short and precise. You should be aware of these terms and look for them in any price chart. But problem is they are not very evident to eyes. Looking at daily chart it is tough to find them.
The only big gap down or gap up are visible. So I personally do not use them often nor I suggest you to do so. It is much better to use the tools or method based on gap up opening and gap down opening as I will discuss in later chapters.
I personally do not use or recommend to use Price Gap types to include in your trade plan.