Gaps are spaces or gaps that appear on asset price charts when there is an abrupt movement in the market. On the candlestick chart, you will notice that there is no smooth transition between prices from one candle to the next. This means that the price has jumped from one level to another without trading at the levels in between.
Types of Gaps and Real Examples
1. Common Gap
- Definition: These gaps are common and usually occur when there is no important news or major events. They usually close quickly as the market adjusts the price.
- Example: Imagine you are following the price of BNB (Binance's cryptocurrency) and during a quiet day, the price jumps from $300 to $305 with no transactions between those two prices. This could be because there were fewer buyers or sellers at that time.
- How to Use: This type of gap often closes, meaning the price will likely fall back or rise to the original level. If you see such a gap on Binance, you could wait for the market to close the gap to enter or exit a position.
2. Breakthrough Gap
- Definition: This gap occurs when the price breaks an important support or resistance level. It usually indicates the start of a new strong trend.
- Example: Let's say Bitcoin (BTC) is struggling to break above a price of $25,000. After many tests of this level, the price jumps sharply from $25,000 to $26,500. This gap indicates that buyers have taken control, which could signal the start of a new uptrend.
- How to Use: In this case, if you see a breakout gap on Binance, it may be a good time to enter a trade in the direction of the breakout (in this example, a buy) as the price may continue to rise.
3. Continuation Gap
- Definition: This type of gap occurs in the middle of a strong trend. It indicates that the market has enough momentum to continue in the same direction.
- Example: Imagine Ethereum (ETH) has been in an uptrend for weeks, rising from $2,000 to $3,000. Suddenly, the price jumps from $3,100 to $3,300 without any transactions in between. This continuation gap suggests that the uptrend has strength to continue rising.
- How to use it: You can use this type of gap as confirmation that the ongoing trend (either bullish or bearish) is strong. This would help you keep your position open if you are already in the market or get in if you are not yet in the market.
4. Exhaustion Gap
- Definition: This gap appears at the end of a trend, whether bullish or bearish. It indicates that the market is running out of steam and the trend is likely to reverse.
- Example: Consider Dogecoin (DOGE), which has been rising exponentially for weeks. Suddenly, the price rises from $0.50 to $0.55 in a gap, but trading volume starts to decline. This could be an exhaustion gap, signaling that enthusiasm for Dogecoin is running out and the price could soon fall.
- How to Use: This type of gap is a warning sign. If you spot it on Binance, you might consider closing a position if you're already in it or avoid opening a new one, as the trend could reverse.
Why Do Gaps Occur?
1. Major News: If a shocking piece of news hits the market, such as a government regulation or the approval of a Bitcoin ETF, prices can jump abruptly, creating a gap.
- Example: If a country bans the use of cryptocurrencies, the price of several cryptos could fall sharply, leaving a bearish gap.
2. Low Liquidity: During times when there is less trading volume (for example, overnight in some markets), gaps may occur because there are not enough buyers or sellers to keep the price fluid.
3. Off-Hours Events: While cryptocurrencies are traded 24/7 on Binance, in traditional markets such as stocks, gaps can form between the close of one day and the open of the next.
How to Take Advantage of Gaps on Binance?
1. Identify Entry or Exit Opportunities: Gaps can act as support or resistance levels. If a gap appears at an important price level, you can use it to place buy or sell orders.
2. Use Gap Closing: Often, gaps close, meaning that the price will return to the previous level. This can give you the opportunity to enter the market at a better price if you wait for the gap to close.
3. Confirm Trends: A breakout or continuation gap can confirm an uptrend or downtrend, helping you decide whether to hold or open new positions.
