Chapter 3 Definitions, Structures, & Examples
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Nirvana Systems Inc.
3-21
Profiting with Chart Patterns
Price Gaps
Pattern example number five is Gaps. There are three different types of gaps:
Breakaway, Measured, and Exhaustion. Breakaway
mark the beginning of a move,
Measured the center of a move and Exhaustion the end of a move. These patterns
offer powerful insight into the psychology of the current market.
Figure 3-20.
Price Gap Pattern
While trading gaps you will want to look at the personality of the chart. Avoid charts
that have gaps all over. These types of charts greatly reduce the significance of the
gap pattern. Look for charts that have a gap here and there. This
will indicate true
changes in supply and demand relative to the chart. We are going to look at each of
these in turn starting with a Breakaway Gap example.
Price Gap Structures: Breakaway, Measured, & Exhaustion
With a Breakaway Gap, you want to look for a gap off a support or resistance level.
As soon as you detect a gap, give it a bar or two after the gap for confirmation that the
chart is actually moving from that point. The problem with gaps is that you really
cannot calculate a good target easily. One idea would be
to use the prior resistance
level, in the case of a Breakaway Gap going to the upside. But it is difficult to validate
good targets. You want to use your Eighths scale to manage the trade and follow
through the change in supply or demand to the upside or downside.
