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Identifying the gap

When you look at a candlestick chart, a "gap" is the difference between the closing price of one candle and the opening price of the next candle. On a chart, it would look like an empty area in between the candles.

Take a look at the following chart:

Gap

  1. The candle opens much lower than the previous day's close. 
  2. The green shaded area shows the gap in between the candles.

As shown above, the gap is that unfilled space between the end of one trading period and the opening of another one.

A gap does not necessarily happen overnight when markets are closed. It could also occur on a shorter time frame during the day.

More often than not, when a gap occurs on a price chart, the price tends to "fill" the gap. In other words, the price – in the context of the chart above – will rise at least the length of the green shaded area.

Take a look at the following chart:

Gap 1 filled

 Knowing that when a gap occurs, the price will likely fill it, we can take advantage of this opportunity using two methods:

  • Placing a trade to fill the gap.
  • Placing a trade after the gap has been filled.

Go on to learn the first method of trading the gap.