1. What is GAP?
GAP, once it involves investment, may be a break between costs on a stock chart that happens once the worth of a stock makes a pointy move up or down with no trading occurring in between.
GAPs are created by factors like regular buying or selling pressure, earnings announcements, an amendment in an analyst's outlook, or a press release.
They are a daily incidence in all money markets.
However, they are rarely seen in the forex and crypto market, since it is highly liquid and trades 24 hours a day. The open on the first day of the week is when gaps are most likely to occur in the stock exchange market.
Here is an example with S&P 500 (SPX):
S&P 500 (SPX) D1 TF
I marked GAP with yellow lines. BTW look how GAPs were closed after, but more details about GAP close will be below.
2. GAP Fill
Sometimes traders say the «GAP was filled».
What does it mean?
When some asset is trading in between a previous price gap, we say the GAP was filled.
Down below you can see previous graph with GAPs, but this time I marked how GAPs were filled.
S&P 500 (SPX) D1 TF
Filled GAPs were marked with blue lines. Also I drew white lines to show which GAP was closed.
In candlestick analysis gaps are usually called windows. When GAP was filled Japanese traders says «window was closed».
Some traders say that GAPs are always filled after, others decline this statement, but this isn't an argue theme for today. I just want to say that price GAPs sometimes are filled within a short period of time and sometimes it takes a whole year to fill the GAP. But crypto market is quite different - small market cap, more volatile and many technical analysis patterns are forming faster.
For comparison: total crypto market cap is at around 120B USD. And according to New York Stock Exchange (NYSE) April's report of 2018, the market cap of that stock exchange is at around 23.14 trillion USD. As you see the whole crypto market cap is only 0.5% of NYSE market cap.
3. Types of GAPs
There are 3 types of GAPs depending on where we can observe it on the graphs (excluding common GAP):
Breakaway GAPs - Assets costs move in ranges or trends.
Ranges area unit once then the value is moving up and down, but little progress is made in either direction.
Trends occur once the price is creating progress either up or down over multiple price swings.
When a worth moves from ranging to trending, it sometimes starts that trend with a breakaway gap.
Usually made by pro-traders.
Runaway GAPs – Once a trend starts and has been running for a short time, more traders start hearing about it.
Any positive news or catalyst brings in traders waiting to get in.
This causes a runaway gap, or a gap within the middle of the trend, indicating that the trend is still strong and picking up steam.
Usually made by amateur traders.
Exhaustion GAPs – An exhaustion gap happens at the top of a trend, often after a significant price increase.
The gap gets higher once a robust advance shows high spirits, where the last remnants of those on the sidelines enter into the trade.
With nobody left to push the worth up, there's a higher spot followed by a lower spot or a strong selloff.
4. GAP analysis: Pro and amateur traders
So, after reading all the above now we should understand who made this GAP. If it was made by pro-traders then we can be sure that trend continues, but if the GAP was made by amateur traders then soon we will see trend reversal.
Remember one important thing - pro-traders (whales) buy after sell wave. And start selling after buy wave. This means that they buy or sell at the beggining of a reversal phase or level breakdown.
But amateur traders do the opposite. When the price for example goes up during several days, they start buying in FOMO. Pro-traders are selling at this time.
Down below you can see a price GAP formed by amateur traders on CME exchange BTC Futures example:
As you see here, amateur traders buy in FOMO.
Buyers start buying BTC on a peak because of FOMO and then the price dropped down.
Here an example with pro-traders (whales):
The second price GAP was formed at the beggining of rise phase and then price started to rise.
When you see the GAP at the beggining of the trend after a sell wave or during the breakout of previous bottom, then expect the price to rise.
If GAP appears after a long period of some trend, then expect the over of this trend.
GAP is a good indicator of further price movement trend. It gives good opportunties for swing traders, because it shows the beggining of a trend or when the trend is over.