Windows (Gap) charting pattern?

In this lesson we will learn the following:

1. What is a Windows / Gap pattern?

2. When does a gap up and gap down occur in a chart?

3. When does a Gap function as a resistance/support?

4. Illustrations pertaining to Gap up and Gap down

5. Classification of Gaps

What Is A Gap Or Windows Pattern?

The window or gap is a vital concept in technical analysis. In Japanese candlestick charting, they are known as windows. In the west, they are generally known as gaps.

A gap generally indicates an area where no trading takes place.

During an Uptrend, when the highest price of one day is lower than the lowest price of the next day, a gap is formed.

During a Downtrend, when the lowest price of one day is higher than the lowest price of the next day, a gap is formed.

Gaps are normally continuation patterns pointing to the existing trend before the window is likely to continue after the window.

The Gap should function as a support in an uptrend or as resistance in a downtrend, for the continuation of the trend.

The window should not be closed, or filled in, on a closing price basis. If the window is closed on a closing price basis, the trend is over.

Whenever there is a gap (current open is not the same as prior closing price), that means that no price and no volume transacted hands between the gap.

When Does A Gap Up And Gap Down Occur In A Chart?

Let’s look into the illustration below for a clear understanding.

When the open Day 2 is less than the close of Day 1, a Gap Down is formed.

Here, it is evident that psychological factors play a vital role behind gaps.

Gaps Function As Follows:

Once price gaps downward, the gap functions as resistance.

When prices go upward, the gap can act as support to crude oil prices in the future.

Let Us Now Look Into The Illustration Of Gaps Functioning As Support And Resistance.

The Chart Below Depicts The Gap Up Functioning As Support For Prices.

We can analyze that, mostly after a gap, crude oil prices will look to fill the gap.

We can assume that a gap is a hole in the price chart. This gap has to be filled back.

Whenever the gaps are filled, the gap tends to reverse direction and move towards the direction of the gap.

In the illustration chart above, we can notice that it moves back upwards.

The illustration shows that the gap functions as a support.

Normally, the traders view anything below the gap as an area of no return.

Let’s Now Analyze The Illustration Below Which Depicts Many Occasions Of Gaps Up And Gaps Down.

We can observe and learn from the chart:

Gaps down can function as areas of resistance.

Gaps up can function as areas of support.

Classification Of Gaps

Gaps can be classified into four types. They are

A.  Common gap

B.   Breakaway gap

C.   Runaway gap

D.  Exhaustion gap

1.  Common Gap:

   It is also known as an area gap or temporary gap.

   It forms when trading is restrained between support and resistance level on a short period and when the market price is moving sideways.

   This happens when the Gold price trend involves neither uptrend nor a downtrend.

   We can notice that the Gold price fluctuates between a comparatively narrow range without forming a trend.

   The price looks to fill the gap by moving up or down.

   Little projection is given if the gap is filled.

2. Breakaway Gap

   It generally forms when the prices break from an area of traffic.

   We can infer that the psychological factors play a vital role and the next move will be influential when the price breaks away from an ascending or descending triangle with a gap.

   If it is massive once the gap is formed, the possibility is higher for the market not to return to fill the gap.

   When the price breaks on a low volume, there is a chance for the gap to fill before price trends proceed.

3. Runaway Gap

   It is also known as the measuring gap.

   It normally occurs halfway through a price move.

   It is not linked with the traffic area. It is expected to form in the accelerated advance or decline.

   This can be utilized to measure the distance it is likely to move ahead.

   The measuring gap will be filled usually for a particular period.

4. Exhausion Gap

   This indicates the end of the move. These gaps are related to an accelerated straight-line advance or decline.

   The measuring gap and the Exhaustion gap can be discriminated by a reversal day.

   We can study that, when it occurs at the top with huge volume, chances are more than the market is exhausted and the existing trend is at pause and is followed by some area pattern formation.

   It is important to note that the exhaustion pattern should not be treated as a significant reversal.

    

   Nut Shell:

   The window or gap is a vital concept in technical analysis.

   A gap generally indicates an area where no trading takes place.

   Gaps are normally continuation patterns pointing to the existing trend before the window is likely to continue after the window.

   During an Uptrend, when the highest price of one day is lower than the lowest price of the next day, a gap is formed.

   During a Downtrend, when the lowest price of one day is higher than the lowest price of the next day, a gap is formed.

   Once the price gaps downward, the gap functions as resistance.

   When the prices gap upward, the gap can function as a support to prices in the future.

   Gaps can be classified into four types. They are the Common gap, Breakaway gap, runaway gap, and Exhaustion gap.