Forex Chart Patterns: Currency Price Gaps

Bar charts and candlestick charts depict gaps that may occur between close and open prices. Technical analysis refers to these gaps as interruptions.

A price gap represents an empty space between one trading period and the trading period before that. As a result of the reversal of the price right after a gap is generated, most specialists believe that it must be filled. The time it takes for the gap to be filled is different for the various types of gaps.

Typically, there are four major types of gaps:

Common Gaps

This type of gaps is observed under the conditions of quiet periods or illiquid forex market. They are characterized as having a short duration and are expected to close soon. Traders consider common gaps a buy signal if they occur in a rising price chart. On the other hand, they tend to sell a currency, when the gap occurs in a down price chart.

Breakaway Gaps

This type of gaps is generally observed in the beginning of a new trend, usually after the currency has been traded in a consolidation pattern. The information that these gaps give refers to the direction of the trend continuation. The strength and the accuracy of the gap signal depends on the volume out of the gap. The larger the volume is, the more likely the currency price will continue to move in the direction of the gap.

Runaway Gaps

This type of gaps is generally observed within solid trends. Since runaway gaps tend to be generated approximately in the middle of a trend, they are commonly referred to as measurement gaps. As a result, the measuring of the trend before the gap occurring and its extrapolation from the measurement gap helps forex traders recognize the trend's end and consequently their price objective.

For the runaway gap trading volume is not that important as it is for the breakaway gap. However, if the volume is too extreme, that could indicate that the runaway gap is in fact an exhaustion gap.

Exhaustion Gaps

This kind of gaps is usually observed when trends change their direction in an unusual quick way. The information that exhaustion gaps provide to forex traders include a negative indication that the current trend is about reverse, as well as an abrupt change in the supply and demand ratio. The exhaustion gap should be accompanied with a large amount of trading volume.

Exhaustion Islands

Sometimes the so called exhaustion islands are created due to the relatively slow reversal of the market trend. Two gaps will occur to the left and right from a consolidation formation.

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