THE HAnDbOOk Of TECHnICAL AnALySIS
participants than the intraday opening and closing prices between the morning
and afternoon trading sessions since there is a longer duration of non‐trading
activity on an interday basis as compared to periods of non‐trading activity be-
tween the intraday trading sessions. In markets where the trading is continuous,
opening and closing prices have lesser importance as compared to high and low
prices, as in the case of the spot foreign exchange (fx) market, which trades con-
tinuously through the week from Sunday evening to the Friday close. Generally
speaking, opening and closing prices are also of greater significance if they belong
to a higher‐timeframe bar or candlestick. Opening and closing prices belonging to
a daily bar are psychologically more significant than those belonging to a one‐ or
five‐minute bar. Finally, the larger the price gap between the last closing and new
opening price, the greater the significance and importance of the opening and
closing prices.
3.2 Gap Action: Four Types of Gaps
There are essentially four ways to define a gap, which is represented by a range of
prices where no trading activity takes place:
Type 1: A gap measured from the close of the previous bar to the open of the next
or current bar—it is created instantaneously at the open. There is an instant
jump in prices—either up or down—with no trading activity taking place be-
tween the two prices.
Type 2: A gap measured from the high or low of the previous bar to the open of
the next or current bar—it is created instantaneously at the open. There is no
trading activity within that price range.
Type 3: A gap measured from the highs or lows of the previous bar to the highs or
lows of the next or current bar—it is created only after the next or current bar has
closed. This is the gap usually referred to as a window in Japanese candlestick or
bar charts. It is also the type of gap referred to frequently when studying break-
away, runaway (also called measuring or midway), and exhaustion gaps (although
Types 1 and 4 gaps are also sometimes referred to when studying such formations).
Type 4: A gap measured from the close of the previous bar to the high or low of
the next bar—it is created after the next or current bar has closed. There is no
trading activity within the price range from the close of the previous bar to the
low or high of the next or current bar.
See Figure 3.9. It should be noted that a gap itself normally represents an area
of support or resistance, depending on whether price is above or below it. This
is especially so when the gap created is a Type 3 gap. The gap or price window
increases in significance and importance with larger gaps. Prices are also generally
expected to return to fill the gap at a later date, although there are many instances
where this does not occur. Finally, it may be of interest to the reader to know that
the average true range (ATR) is somewhat related to a Type 4 gap, where the true
range is either the range of the new bar or distance between the close of the last
bar and the high or low of the new bar, depending on whichever is greater.
