Mind the Gap – and watch your profits soar

by Aug 19, 2021All Articles, Technical Analysis, Education

Gaps are one of the most important tools we have as Technical Analysts. When a significant gap happens in the opposite direction to the trend, that breakaway is telling us that the trend is most likely changing. When we see a gap in the middle of a move, then it is like someone poured fuel on the fire. The question then is if the trend is sustained, or if the gap gets filled.

Gaps are said to be filled when price quickly runs out of steam and retraces back to fill the prices that were skipped by the gap.

Types of Gaps:

  • Breakaway: usually occur at the start of a trend
  • Runaway / Measuring: occur in the middle of a strong trend, allowing for price projection
  • Exhaustion: occur at the end of a trend
  • Opening: when the open of a bar is outside the range of the previous bar
It’s important for us to know when gaps occur and how quickly they get filled. This is where the Optuma 2.0 Gap Finder comes in.

Before, the way to show gaps was by using a simple script in a watchlist or chart using a simple formula:

Gap Up: LOW() > HIGH()[1];

Gap Down: HIGH() < LOW()[1]

This is useful, but the Gap Finder tool draws a shaded area on a chart to help visualise the gap zones on the chart.

In this example, two green breakaway gaps last November identified the start of a new trend in CSCO, which filled three previous gaps down (in red), the first of which occurred back in July 2019:

Like most of our tools, the properties can be adjusted to suit your needs, such as the percentage size of the gap, and whether partially-filled gaps should be included. Also, if the gap gets filled within a certain timeframe (20 days by default) then it will have failed, and be ignored.

Using the Gap Finder in Scripting

 

The GAP() function in scripting has four output values, allowing you to search for any conditions:

GapAbove – Price of the beginning of the next gap zone above.

GapBelow – Price of the beginning of the next gap below.

GapAboveSize – the width of the zone above (in $).

GapBelowSize – the width of the zone below (in $).

For example, to show how far in percent the current price action is above a gap below – based on a 0.5% gap – you would use this:

Microsoft is currently 4.1% above the partially-filled recent gap, and moving away:

In fact, as this gap occurred in a strong trend it could be a potential runaway gap, giving a price target of $326 as measured from the low to the middle of the gap. Of course, if the gap gets filled in the coming days then it could be an exhaustion gap, so one to keep an eye on!
The Gap Finder tool is available in Optuma 2 which is currently in beta testing. Contact Support if you would like access to it now.
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Darren Hawkins, MSTA

Darren Hawkins, MSTA

Senior Software Specialist at Optuma

Darren is the senior Software Specialist at Optuma. He joined the company in 2009 after attending an introductory technical analysis course. Darren now instructs users all over the world, from experienced Wall Street traders and professional money managers to individual traders drawing their first trendlines.

Darren grew up in the UK and attended college in the USA where he earned a BA in Economics from St Mary's College of Maryland. He went on to spend a few years working at the Nasdaq Stock Market in Washington DC. Going on to live and work in Australia, the US and currently the UK, Darren has a broad understanding of the individual needs of traders, portfolio managers and investors utilising a wide range of methodologies.

In 2014 Darren passed the UK-based Society of Technical Analysts diploma course, and when not looking at charts he keeps a keen eye on England's cricket team - especially if they are playing against Australia. He lives in the Essex countryside in England, with wife Wendy and their labrador, Gabba.

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