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lesson no.1️⃣1️⃣
part 01
Gaps, in the world of technical analysis, represent areas on a chart where no trading activity took place, resulting in a "gap" in the price chart. Recognizing and understanding the significance of these gaps can be pivotal for traders to capitalize on potential opportunities and manage risk.
A gap occurs when there's a significant difference between the closing price of one period and the opening price of the next, without any trading occurring between these two prices. These gaps are often the result of some fundamental event or news item that significantly changes the perceived value of an asset overnight.
What it is and what it shows
Gaps can appear on any time frame, from minute charts up to monthly charts, and can be observed in stocks, futures, forex, and other financial markets. They often indicate strong sentiment about a security and can give insights into the future direction of its price.
The types of gaps include:
Common Gaps: These are usually not associated with any news event and are often filled relatively quickly. They don't offer much insight into price direction.
Breakaway Gaps: These gaps occur after a consolidation or trading range and signify the start of a new trend. A stock that's been trading in a tight range may suddenly gap up or down, signaling the beginning of a new uptrend or downtrend.
Runaway (or Measuring) Gaps: These gaps are seen in the middle of a trend and suggest the trend is likely to continue. For example, in a bullish trend, a runaway gap would be a gap up, indicating strong interest even at higher prices.
Exhaustion Gaps: These are found near the end of a trend, signaling that the trend might be running out of steam and a reversal could be near.
Island Reversal Gaps: This is a scenario where the market gaps in the direction of the prevailing trend, trades for a few days, and then gaps back in the opposite direction, leaving a "gap island" on the chart. This can be a powerful reversal signal.
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part🅾️2️⃣
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How to trade it
Volume can be integrated into various trading strategies:
Volume and Breakouts: When a stock breaks above a resistance level (or below a support level) on high volume, it's often a valid signal that the breakout is genuine. This can be an opportune time for a trade.
Example: If a stock has been trading between $10 and $12 and suddenly breaks above $12 on significantly higher volume than the recent average, it might indicate strong buying interest and a potential continued upward move.
Volume Climax: A sudden spike in volume after a strong trend might indicate a climax or exhaustion move. This can be a sign of a potential trend reversal.
Example: If a stock has been steadily climbing and then sees a sharp upward move on very high volume (much higher than previous days), it could suggest a buying climax and potential for a pullback or reversal.
On Balance Volume (OBV): OBV is a momentum indicator that uses volume flow to predict changes in stock price. It adds volume on up days and subtracts volume on down days. A rising OBV suggests that volume is flowing into an asset, while a falling OBV indicates outflow.
Volume Divergence: When price and volume diverge, it can signal a potential trend change. For instance, if price is rising but volume is decreasing, it could suggest a lack of conviction in the upward move and a potential reversal.
Example: A stock reaches new highs, but the volume starts to decline with each new high. This divergence can be a warning sign that the uptrend may not be sustainable.
When using volume in technical analysis, it's essential to always use it in conjunction with other indicators and tools. No single indicator should be used in isolation.
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