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Technical Analysis of Gaps: Identifying Profitable Gaps for Trading by Richard J. Bauer, Julie R. Dahlquist

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Chapter 7. Gaps and Moving Averages

Chapter 5, “Gaps and Previous Price Movement,” examined the relationship between gaps and price movements immediately around the time of the gap. Specifically, you looked at candle colors on the day before the gap and the day of the gap. You saw that noting the color of the candle the day before a gap occurred did help determine profitable trading strategies. When you saw a black candle on Day –1 and a gap on Day 0, the returns on Day 1 tended to be positive. This was especially true for down gaps, suggesting that when downward price movement on Day –1 is followed by a down gap on Day 0, much of the downward pressure on price is exhausted and a reversal is likely.

This chapter takes a slightly longer-term view. ...

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