Best Stock Hints Latest Tips To Buy & Invest Best Stocks Today
Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.
Statistics updated on 11/8/2018.
My book,
Encyclopedia of Chart Patterns Second Edition
pictured on the left, covers 63 chart and event patterns, including gaps. The book discusses performance statistics and explores how gaps behave. It’s worth buying a copy.
Gaps are useful for showing support or resistance zones but as a tradeable, by the time you
properly identify them, the move is nearly over. If you already own a stock and a chart pattern breaks out in a gap,
then hold on for a strong move. Performance improves two-thirds of the time in the chart patterns I looked at.
Gap Identification Guidelines
Gaps occur when today’s high is below yesterday’s
low (bearish gap), or today’s low is above yesterday’s high (bullish
gap).
| Gap Type | Discussion |
| Area, common or pattern gaps | These are synonyms for the same gap type. Occurs in congestion (trendless markets) and closes quickly, usually in a few days. Volume on the gap day may be high but returns to normal in a day or two. Few new highs (upward trends) or lows (downward trends) occur after the gap. A distinctive price curl as the gap closes quickly is a clue to this gap type. |
| Breakaway gaps | Starts a new trend and the gap often occurs on leaving a consolidation area, usually on high volume on the gap day, which can continue for several days. Price trends for several days. |
| Continuation, measuring, or runaway gaps | These are synonyms for the same gap type. Gap occurs during a straight-line advance or decline. Price makes new highs or lows without closing the gap. Volume is usually high. |
| Ex-dividend gaps | Caused by a dividend distribution. Price moves down by the amount of the dividend and a gap appears but it’s usually closed by the end of the trading day. |
| Exhaustion gaps | Happens at the end of a trend on high volume. The gap is usually not followed by new highs or lows, and the gap may be unusually tall. After the gap, price consolidates or reverses direction. Commonly occurs after continuation gaps. Exhaustion gaps usually close within a week. |
Gap Trading Tips
| Gap Type | Explanation |
| Area, common or pattern gaps | These close too quickly to be of trading significance. |
| Breakaway gaps | Look for a high volume gap and trade in the direction of the trend. The best performance comes from breakaway gaps in a bull market near the yearly high. In a bear market, trade those near the yearly low. |
| Continuation, measuring, or runaway gaps | On a time basis, usually marks the halfway point in an upward price move. By price, the middle of the gap appears between 50% and 52% along the very short-term trend (usually the distance between the closest minor high and low). Measure from the swing low or high to the gap center and project from the gap center to the predicted high or low. |
| Ex-dividend gaps | These close too quickly to be of trading significance. |
| Exhaustion gaps | If an unusually wide gap occurs, it may mark the end of the trend (immediately or within a few days). Violent reversals can follow an exhaustion gap, so consider taking a position in the new direction. |
| Stop loss | Gaps are places of weak support or resistance, but you can use them for a stop location. Place a stop a few cents below the gap (upward breakouts) or above the gap (downward breakouts). |
Median Time to Close the Gap (bull market)
Closing the gap means price rises/declines to fill the gap, covering the opening. See the chart near the top of this page for an example of a closed gap.
| Trading Tactic | Explanation |
| Area, common or pattern gaps | 3-4 days for both breakout directions |
| Breakaway gaps | 96 days for upward breakouts, 90 days for downward breakouts. |
| Continuation, measuring, or runaway gaps | 46 days for upward breakouts, 27 days for downward breakouts. |
| Exhaustion gaps | 6 days for upward breakouts, 5 days for downward breakouts. |
Tip: gaps that occur on the day of a chart pattern breakout
suggest a better performing chart pattern two out of three times, regardless of the breakout direction.
Gap Example
The above figure shows examples of various gap types. Breakaway gaps exit from congestion areas. Area gaps close
quickly. Exhaustion gaps appear at the end of a trend. Continuation gaps show in the middle of trends.
— Thomas Bulkowski
Other Gap Examples
Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.
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