Chapter 6
Gaps
A gap is simply space between two prices. On daily, weekly, and monthly charts, traditional gaps are easy to spot. For example, if the market is in a bull trend and today's low is above the high of yesterday, then today gapped up. These traditional gaps are called breakaway or breakout gaps when they form at the start of a trend, measuring gaps when they are in the middle of a trend, and exhaustion gaps when they form at the end of a trend. When a gap forms at other times, like within the spike phase of a trend or within a trading range, it is simply called a gap. Traders usually cannot classify a gap until after they see what the market does next. For example, if the market is breaking out of the top of a trading range on the daily chart and the breakout bar is a large bull trend bar with a low above the high of the prior bar, traders will see the gap as a sign of strength and will think of it as a potential breakaway gap. If the new bull trend continues for dozens of bars, they will look back at the gap and definitively call it a breakaway gap. If instead the market reverses down into a bear trend within a few bars, they will call it an exhaustion gap.
If the bull trend goes for five or 10 bars or so and gaps again, traders will think that this second gap might become the middle of the bull trend. They will see it as a possible measuring gap, and many traders will look to take profits on their longs once the market makes a measured move up. The measured move is ...
