types of gaps: common, breakaway, runaway, andexhaustion

tags:Common Gaps,Breakaway Gaps,Exhaustion Gaps,Runaway Gaps,Signals for Breakaway Gaps,Trading Signals for Runaway Gaps 

gaps

An opening outside the previous day's or other period's range generates a price gap.

Price gaps, as plotted on bar charts, are very common in the currency futures market. Although currency futures may be traded around the clock, their markets are open for only about a third of the trading day. For instance, the largest currency futures market in the world, the Chicago IMM, is open for business 7:20 am to 2:00 pm CDT. Since the cash market continues to trade around the clock, price gaps may occur between two days' price ranges in the futures market.

There are four types of gaps: common, breakaway, runaway, and exhaustion.

Common Gaps

Common gaps have the least technical significance of all the types of gaps. They do not indicate a trend start, continuation, reversal, or even a general direction of the currency other than in the very short term. Common gaps tend to occur in relatively quiet periods or in illiquid markets. When price gaps occur in illiquid markets, such as distant currency futures expirationdates, they must be completely ignored. The entries for distant expiration dates in currency futures are made only on a closing basis, and they do not reflect any trading activity. Never trade in an illiquid market because getting out of it is very difficult and expensive. When gaps occur within regular trading ranges, the word on the street has been that, "Gaps must be filled.". Common gaps are short term. When currency futures open higher than yesterday's high, they are quickly sold, targeting the level of the previous day's high.

Breakaway Gaps

Breakaway gaps occur at the beginning of a new trend, usually at the end of long consolidation periods. They may also appear after the completion of some chart formations that tend to act as short-term consolidations.Breakaway gaps signify a brisk change in trading sentiment, and they occuron increasingly heavy trading. Traders are understandably frustrated by consolidations, which are rarely profitable. Therefore, a breakout from the slow lane is embraced with optimism by the profit-hungry traders. The price takes a secondary place to participation. As always, naysayers follow the initial breakout. Sooner rather than later, the pessimists have no choice but to join the new move, thus creating more volume.

Breakaway gaps are not likely to be filled during the breakout and for the duration of the subsequent move. In time, they may be filled during a new move on the opposite side.

In Figure 5.34., the currency futures trades sideways in a 100-pip range between 0.6550 and 0.6690 for a period of time. A price gap between 0.6690 and 0.6730 signals the breakaway from the range. 

Figure 5.34. A typical breakaway gap.

Signals for Breakaway Gaps:

1. A breakaway gap provides the price direction.
2. There is no price objective.
3. Increasing demand for a currency ensures a solid move on good volume in the foreseeable future.

Runaway Gaps

From a technical point of view, runaway, or measurement, gaps are special gaps that occur within solid trends. They are known as measurement gaps because they tend to occur about midway through the life of a trend. Thus, if you measure the total range of the previous trend and extrapolate it from the measurement gap, you can identify the end of the trend and yourprice objective. Since the velocity of the move should be similar on both sides of the gap, you also have a time frame for the duration of the trend.

Trading Signals for Runaway Gaps

1. The runaway, or measurement, gap provides the direction of the market. As a continuation pattern, this type of gap confirms the health and the velocity of the trend.
2. Volume is good because traders like trends, and confirmed trends attract more optimism and capital.

3. This is the only type of gap that also provides a price objective and a time frame. These characteristics are also useful for developing hedging

Exhaustion Gaps

Exhaustion gaps may occur at the top or bottom of a formation when trends change direction in an atypically quick manner. There is no consolidation next to the broken trend line: The trend reversal is very sharp through a bullish move, looks a lot like a measurement gap. So traders buy the currency and stay long overnight on that assumption. The following day the market opens below the previous low, generating a second gap. If the second gap is filled or does not even occur, the trading signal remains the same. Traders do not have to get caught badly in this exhaustion gap. A sudden trend reversal is unlikely to occur in an information void. Some sort of identifiable event triggers the move—maybe a government fall or a massive and well-timed central bank intervention. Therefore, traders should at least be warned.

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Wedge Formation and Rectangle Formation-Trend Continuation Patterns

 TAGS:Wedge Formation,Rectangle Formation, Patterns,typical bearish rectangle,bullish rectangle,Triangle Formation,Flag formation AND Pennant formation

 Wedge Formation

The wedge formation is a close relative of the triangle and the pennant formations. It resembles both the shape and the development time of the triangles, but it really looks and behaves like a pennant without a pole. The wedge is markedly sloped, and the breakout occurs in the direction opposite to its slope (see Figure 5.31.), but similar to the direction of the original trend. The signal we receive from the wedge formation is direction only. There is no reliable price objective. Depending on the trend direction, there are two types of wedges: falling (see Figure 5.31.) and rising.

Figure 5.31. Diagram of a falling wedge

Rectangle Formation

Also known as a trading range (or congestion), the rectangle formation reflects a consolidation period. Upon breakout, it is likely to continue the original trend. Its failure will change it from a continuation to a reversal pattern. This pattern is easy to spot, as it can be considered a minor side-ways trend.

If it occurs within an uptrend and the breakout occurs on the upside, it is called a bullish rectangle. (See Figure 5.32.) The price objective is the height of the rectangle. As Figure 5.32. shows, the currency moves between welldefined, flat support and resistance levels. A valid breakout may occur on either side from this consolidation period. The price target (GH) is equal to the height of the rectangle (G'H), measured from the breakout point H. In the numerical example, the price objective is 1.6200, as the 100-pip difference between 1.6100 and 1.6000, measured from 1.6100.

If the consolidation occurs within a downtrend and the breakout continues the original trend, then it is called a bearish rectangle. (See Figure 5.33.) Asshown in Figure 5.33., the currency moves between well-defined, flat support and resistance levels. A valid breakout may occur on either side of this consolidation period. The price objective (HG') is equal in size to the height of the rectangle (GH), measured from the breakout point H. In the numerical example, the price objective is 100.00, as the 100-pip difference between 102.00 and 101.00, measured from 101.00.

Figure 5.32. shape1 Diagram of a typical bullish rectangle

Figure 5.32. shape2 Diagram of a typical bullish rectangle

Figure 5.33. Diagram of a typical bearish rectangle

Do you like to read about others Trend Continuation Patterns like Triangle Formation click here or Flag formation AND Pennant formation click here

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Triangle Formation-Trend Continuation Patterns

TAGS:Triangle Formation,expanding triangle,Trading volume,descending triangle,typical ascending triangle,symmetrical triangle,bullish symmetrical triangle,Flag formation AND Pennant formation,Wedge Formation and Rectangle Formation

Triangle Formation 

Triangles can be visualized as pennants with no poles. There are four types of triangles: symmetrical, ascending, descending, and expanding (broadening).

A symmetrical triangle consists of two symmetrically converging support and resistance lines, defined by at least four significant points. (See Figure 5.25.) The two symmetrically converging lines suggest that there is a balance between supply and demand in the foreign exchange market. Consequently, a break may occur on either side. In the case of a bullish symmetrical triangle, the breakout will occur in the same direction, qualifying the formation as a continuation pattern.

Figure 5.25. A market example of a bearish pennant

As Figure 5.26. shows, the converging lines are symmetrical. The declining line is defined by points B, D, and F. The rising support line is defined by points A, C, E, and G. The price target is either (1) equal to the width of the base of the triangle BB', measured from the breakout point H (HH'); or (2) at the intersection of line BI (which is a parallel line to the rising line AG) with the price line.

Trading volume will visibly decrease toward the end of the triangle, suggesting the ambivalence of the market. The breakout is accompanied by a rise in volume.

In the numerical example, the price objective is either 1.5500, as the difference between 1.5000 and 1.4000, measured from 1.4500 or 1.5300, as the difference between 1.5000 and 1.4000, measured from 1.4300.

Figure 5.26. shape1 Diagram of a bullish symmetrical triangle

Figure 5.26. shape2 Diagram of a bullish symmetrical triangle

The ascending triangle consists of flat resistance line and a rising support line. (See Figure 5.27.) The formation suggests that demand is stronger than supply. The breakout should occur on the upside, and it consists of the width of the base of the triangle as measured from the breakout point. As you can see in Figure 5.28., the resistance line defined by points A, C, and E is flat. The converging bottom line, defined by points B, D, and F, is sloped upward. The price objective is the with of the base of the triangle (AA') measured above the resistance line from the breakout point G (GG'.) In the numerical example, the price objective is 106.00, as the 200-pip difference between 105.00 and 103.00, measured from 104.00.

Trading volume is decreasing steadily toward the tip of the triangle, but increases rapidly on the breakout.

Figure 5.27. An example of a symmetrical triangle

Figure 5.28. shape1 Diagram of typical ascending triangle

Figure 5.28. shape2 Diagram of typical ascending triangle

The descending triangle is simply a mirror image of the ascending triangle. It consists of a flat support line and a downward sloping resistance line. (See Figure 5.29.) This pattern suggests that supply is larger than demand. The currency is expected to break on the downside. The descending triangle also provides a price objective. This objective is calculated by measuring the width of the triangle base and then transposing it to the breakpoint. As shown in Figure 5.29., the support line, defined by points A, C, E, and G, is flat. The converging top line, defined by points B, D, F, and H, is sloped downward. The price objective is the width of the base of the triangle (AA'), measured above the support line from the breakout point I (IF.)

In the numerical example, the price objective is 1.3000, as the 1000-pipdifference between 1.5000 and 1.4000, measured from 1.4000.

Figure 5.29. shape1 Diagram of a descending triangle

Figure 5.29.shape2  Diagram of a descending triangle

Trading volume is decreasing steadily toward the tip of the triangle, but increases rapidly on the breakout.

The expanding (broadening) triangle consists of a horizontal mirror image of a triangle, where the tip of the triangle is next to the original trend, rather than its base. (See Figure 5.30.) Volume also follows the horizontal mirror image switch and increases steadily as the chart formation develops. As shown in Figure 5.30, the bottom support line, defined by points B, D, and F, and the top line, defined by points A, C, and E, are divergent. The price objective should be the width, GG', of the base of the triangle, measured from the breakout point G.

In the numerical example, the price objective is 102.00, as the 100-pip difference between 101.00 and 100.00, measured from 101.00.

Figure 5.30. shape1 Diagram of an expanding triangle

Figure 5.30. shape2 Diagram of an expanding triangle

Do you like to read about others Trend Continuation Patterns like Flag formation AND Pennant formation click here or Wedge Formation and Rectangle Formation click here

 

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Flag formation AND Pennant formation-Trend Continuation Patterns

TAGS:Flag formation,continuation patterns,Pennant Formation,a bearish pennant,bullish pennant,a bear flag formation,Rectangles,Wedges,Triangles,Pennants,Flags,Triangle Formation,Wedge Formation and Rectangle Formation

 Trend Continuation Patterns

Technical analysis provides charts that reinforce the current trends. 

These chart formations are known as continuation patterns. They consist of fairly short consolidation periods. The breakouts occur in the same direction as the original trend.

The most important continuation patterns are:

1. Flags
2. Pennants
3. Triangles
4. Wedges
5. Rectangles

Flag formation

The flag formation provides signals for direction and price objective. This formation represents a brief consolidation period within a solid and steep upward or downward trend. The consolidation itself is bordered by a support line and a resistance line, which are parallel to each other or very mildlyconverging, making it look like a flag (parallelogram) and tends to be sloped in the opposite direction from the slope of the original trend, or is simply flat. The previous sharp trend is resembles a flagpole.

If the original trend is going down, the formation is called a bearish flag. (See Figure 5.22.) As Figure 5.22. shows, the original trend is sharply down. The flagpole is measured between points A and B. The consolidation period occurs between the support line B to E and the resistance line C to D. When the price penetrates the support line at point E, the trend resumes its fall, with the price objective F, measured from E. The price target is of about equal amplitude with the flagpole's length (A to B), measured from the breakout point through the support line (B to E.)

In the numerical example, the height of the flagpole is measured as thedifference between 140.00 and 120.00 equals 2000 pips. Once the support line is broken at 125.00, the price target is 105.00, as 2000 pips from 125.00.

Pennant Formation

The pennants are closely related to the flags. The same principles apply. The sole difference is that the consolidation area better resembles a pennant, as the support and resistance lines converge. If the original trend is bullish, then the chart pattern is a bullish pennant. In Figure 5.23., the pennant pole is A to B The pennant-shaped consolidation is framed by C, B, and D. When the market breaks through the resistance line B to D, the price objective is E. The amplitude of the target price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts from the breakout point.

Figure 5.22. SHAPE 2 Diagram of a bear flag formation

Figure 5.22.SHAPE1 Diagram of a bear flag formation

In the numerical example, the height of the pennant pole is measured as the difference between 1.5500 and 1.4500, or 1000 pips. Once the resistance line is broken at 1.5200, the price target is 1.6200, as 1000 pips from 1.5200.

Figure 5.23.  SHAPE 2Diagram of a bullish pennant.

Figure 5.23. SHAPE 1 Diagram of a bullish pennant.

If the original trend is going down, then the formation is a bearish pennant. In Figure 5.24., the pennant pole is A to B. The pennant-shaped consolidation is framed by C, B and D. When the market breaks through the support line B to D, the objective price is E. The amplitude of the target price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts from the breakout point.

In the numerical example, the height of the flagpole is measured as the difference between 139.00 and 119.00, or 2000 pips. Once the support line is broken at 120.00, the price target is 100.00, as 2000 pips from 120.00.

Figure 5.24.SHAPE 2 Diagram of a bearish pennant

Figure 5.24. SHAPE 1 Diagram of a bearish pennant

Do you like to read about others Trend Continuation Patterns like Triangle Formation click here or Wedge Formation and Rectangle Formation click here

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