Gap Types

Continuation Gap

Most daily gaps tend to fill during the following few weeks. In the case of Continuation gaps, prices make new highs, or new lows, without filling the gap for extended periods of time. Continuation Gaps are signaling a continuation of an existing trend. The Breakaway gap forms at the start of a trend, while a Continuation gap forms in the middle of trend. Moreover, the volume during the Continuous gaps is heavy. Prices should make new highs or new lows immediately after the gap to "continue" the prior trend. Trading Continuous gaps could be relatively easy as the trend direction is clearly established prior to the gap

Exhaustion Gap

An Exhaustion gap occurs near the end of the trend and is not followed by new highs or new lows after the gap bar. Exhaustion gaps are great trading opportunities for reversal signals, as markets tend to fall or rise violently after the gap formation. These gaps can be easily detected as the prices reverse quickly after a gap and prices attempt to close below the gap. After an Exhaustion gap, enter a "short" trade below the low of the gap bar, and place a "stop" above the swing high of the pattern. Exhaustion gaps result in extensive sell- offs from the prior uptrend. Place targets near the swing lows prior to the Exhaustion gap trend rally.

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