Gaps occur when price opens significantly above or below the prior close, leaving an unfilled space on the chart. Gap trading strategies exploit the tendency for gaps to either fill (price returning to close the gap) or continue (price extending in the gap direction). Understanding gap types — common, breakaway, runaway, and exhaustion — helps traders determine whether to fade the gap or trade its continuation.
Common gaps occur within ranges and are typically filled quickly. Breakaway gaps occur at the start of a new trend and are less likely to fill in the near term. Runaway (measuring) gaps occur mid-trend and signal strong continuation momentum. Exhaustion gaps appear at the end of a trend and are followed by a reversal. Gap fill trading fades the gap back toward the prior close. Volume on the gap is a critical indicator — high volume supports continuation, low volume favours fill.
Fade common gaps by entering in the fill direction when price shows reversal signals at the gap extreme. Trade breakaway gaps in the gap direction on the first pullback with volume confirmation. Measure the prior move to identify potential runaway gaps and trade for continuation. Enter exhaustion gap fades only after confirmation of reversal on a lower timeframe.
Gap fill target: the prior session's closing price. Continuation gap target: a measured move equal to the gap length or the next structural level. Stop beyond the gap's extreme for fade trades. Exit if a gap fill trade does not show progress within the first thirty to sixty minutes.
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In crypto markets, true gaps are rare due to continuous trading, but they do occur on some exchanges during maintenance windows or on CME Bitcoin futures which have session closes. Gap analysis is most applicable to equity and futures markets. When gaps do appear in crypto, they tend to fill with high probability, making fade strategies effective.
Divergence occurs when price action and an indicator (RSI, MACD, CCI, OBV) move in opposite directions, signaling weakening momentum and potential reversals. Regular divergence signals reversal. Hidden divergence signals continuation. Divergence is a leading signal — it warns of momentum shifts before they appear in price.
Chart patterns are geometric price formations that signal continuation or reversal. Major patterns include: Head & Shoulders (reversal), Double Top/Bottom (reversal), Bull/Bear Flags (continuation), Rising/Falling Wedges (reversal), Ascending/Descending Triangles (continuation/reversal). All are measured-move patterns with projected price targets.
Donchian Channels plot the highest high and lowest low over a specified lookback period, creating a dynamic channel that defines the current price range. Originally popularised by the legendary Turtle Traders, Donchian Channel breakouts capture new trends at their inception by entering when price exceeds the prior range extreme. The channel width also serves as a volatility measure and position-sizing input.
Support and resistance (S/R) levels are price zones where buying or selling pressure has historically prevented the price from continuing in its current direction. Support is a floor where buying emerges; resistance is a ceiling where selling appears. S/R levels are the foundation of technical analysis and provide the framework for every trade setup.