Four gap types as falsifiable trade hypotheses

A gap is a blank interval

An upside gap is the absence of trade between the prior session high and the next session low. A downside gap is the absence of trade between the prior session low and the next session high. On bar and candle charts that unused interval appears as blank space.

In this archive workflow a gap is that blank price interval: no trade between the prior session extreme and the next session extreme in the opposite direction.

Classify by location, size, and volume

A gap is assessed by direction, location, size, and volume on the day it forms. Size and volume are judged relative to earlier gaps rather than as fixed thresholds. Location means where the blank sits in the prior move.

Initiation and breakaway gaps

An initiation gap, also called a breakaway gap, is typically large and forms on heavy volume. It often, but not always, marks the start of a sizable directional move. It frequently follows unexpected news whose lasting importance still has to be judged.

A later retracement that reaches the near edge of an unfilled gap without closing through it is a pullback to the gap edge. If that pullback fails to fill the initiation gap and price then resumes in the gap's direction, the sequence confirms the initiation reading. If the pullback fills the gap, the initiation reading is discarded and price is more likely than not to continue in the fill direction.

Continuation and runaway gaps

A continuation gap, also called a runaway gap, is identified by its place in a fast one-way move, not by size or volume. It occurs more often in thinly traded vehicles and usually sits near the midpoint of the move in which it appears.

The unfinished half of a continuation-gap move can be estimated by measuring from the start of the move to the middle of the gap, or from halfway between two such gaps when two appear. The gap itself does not forecast direction after that move ends.

Trading and common gaps

A trading gap, also called a common gap, is a small blank that forms in ordinary trade on medium or low volume. It carries little implication for overall direction and is usually filled, often within a few weeks. The saying that all gaps fill is treated as largely true for this type and not necessarily for the others.

Exhaustion gaps

An exhaustion gap appears near the end of a sizable multi-month move. It can be large on light volume, is more common at tops than bottoms, and may exit a congestion pattern. At the moment it forms, it always continues the prior long-term direction.

Sequences and hybrid gaps

A trading gap followed by an initiation gap is read as a major reversal signal in which much of the prior move may retrace. Hybrid gaps are uncommon. They mix two gap behaviors when news sentiment is split.

One input among several

Gaps are only one input in a broader technical reading that also weighs price, volume, and indicators. When a volume reading and a price reading disagree, the volume reading is treated as usually more reliable. The whole framework remains probabilistic rather than certain.