IDENTIFYING PROFITABLE GAPS FOR TRADING
J U L I E R. DA H L Q U I S T
R I C H A R D J. BA U E R , JR .
Gaps have attracted the attention of market technicians since the earliest days of stock charting.
Agap occurs when a security’s price jumps between two trading periods, skipping over certain prices. A gap creates a hole, or a void, on a price chart. Because technical analysis has traditionally been an extremely visual practice, it is easy to understand why early technicians noticed gaps. Gaps are visually conspicuous on a price chart. Consider, for example, the stock chart for Huntington Bancshares (HBAN) inFigure 1.1. A quick glance at the price activity reveals four gaps.Gap types differ based on the context in which they occur. Some price gaps are meaningful, and others can be disregarded.
Breakaway (or Breakout) Gaps
A breakaway gap is one that occurs at the beginning of a trend (see Figure 1.2). In November 2006, AT&T (T) was in a trading range. On November 29, the stock gapped up and an uptrend began. Because profits are made by jumping on and riding a trend, breakaway gaps are considered the most profitable gaps for trading purposes.
1: What Are Gaps?
2: Windows on Candlestick Charts
3: The Occurrence of Gaps
4: How to Measure Returns
5: Gaps and Previous Price Movement
6: Gaps and Volume
7: Gaps and Moving Averages
8: Gaps and the Market
9: Closing the Gap
10: Putting It All Together