How can you measure the size of a gap in a stock chart?

1 Gap size methods

When measuring the size of a gap on a stock chart, there are several methods to consider depending on the type of data and analysis you use. For example, the absolute gap size is simply the difference between the high or low of the previous bar and the low or high of the current bar. Alternatively, the relative gap size is calculated by taking the ratio of the absolute gap size to the previous bar's range or close. This method adjusts for volatility and allows for comparison across different stocks and time frames. Additionally, gap fill percentage indicates how much of the gap was closed by market action and how likely it is to remain open. This method is calculated by taking the percentage of the gap that is filled by subsequent price action.

2 Gap types

Gaps in a trend can be divided into four main types, based on their position and significance. Common gaps occur within a trading range or sideways market and are usually caused by normal fluctuations in supply and demand. These gaps are often filled quickly and have little effect on the trend. Breakaway gaps, on the other hand, occur at the beginning of a new trend or breakout from consolidation and are usually caused by a significant change in supply and demand, indicating strong momentum in the gap's direction. They are rarely filled and have a high impact on the trend. Runaway gaps appear within an existing trend or continuation pattern, indicating an acceleration of supply and demand. These gaps have a moderate impact on the trend but are rarely filled. Lastly, exhaustion gaps occur at the end of an existing trend or reversal pattern, usually caused by a final surge of supply and demand that signals a loss of momentum in the gap's direction. These gaps are often filled and have a low impact on the trend.

3 Gap patterns

Gaps can form various patterns on a stock chart, depending on their number, direction, and location. The most common gap patterns are the island reversal, measuring gap, and partial gap. An island reversal indicates a reversal of the previous trend and consists of an exhaustion gap up, a trading range, and a breakaway gap down. A measuring gap indicates a continuation of the previous trend and consists of a breakaway gap up, a price advance, and a runaway gap up. Finally, a partial gap indicates a pause or slowdown in the previous trend and consists of a gap up, a price retreat, and a support level within the gap. Gaps are useful tools for technical analysis as they reveal supply and demand dynamics. However, to confirm the trend and signal they should be used in conjunction with other indicators.