There are four types of gaps and they are traded in different manners.
Breakaway gap - This gap is seen when price makes a strong directional move from an area of consolidation.
A breakaway gap with significant volume after the gap is a sign of a strong trend and is unlikely to be filled.
Common gap - These are also known as area gaps, pattern gaps, and temporary gaps.
These are the gaps that traders see most often in trading ranges and during sideways movement.
Exhaustion gap - This type of gap is viewed as a signal that a trend is ending and that a new pattern or trend is likely.
Measuring Gap - also known as a runaway gap or continuation gap these gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying asset's future direction.
A common mistake when trading gaps is confusing exhaustion and measuring gaps.
Keeping an eye on the volume can help to find the clue for discerning between measuring gap and exhaustion gap.
The bottom line? Measuring gaps and breakaway gaps are far less likely to be filled than exhaustion and common gaps.
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