Runaway gap

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  1. Runaway Gap

A runaway gap (also known as a measuring gap, breakaway gap, or expansion gap) is a significant price gap in a financial market's chart that indicates a strong continuation of an existing trend. It's a powerful signal for traders, often suggesting a rapid and substantial move in the price of an asset. Understanding runaway gaps is crucial for both day trading and longer-term investing, as they can provide valuable insights into market sentiment and potential profit opportunities. This article will provide a comprehensive overview of runaway gaps, covering their characteristics, formation, how to identify them, how to trade them, and how they differ from other types of gaps.

What is a Price Gap?

Before diving into runaway gaps specifically, it’s important to understand what a price gap is in general. A price gap occurs when the price of an asset opens significantly higher or lower than the previous day's close, with little or no trading occurring in between. This results in a visible “gap” on a price chart. Gaps happen because of imbalances between buyers and sellers. News events, earnings reports, or sudden shifts in market sentiment can trigger these imbalances. There are several types of gaps, each with unique characteristics and implications. These include:

  • Common Gaps: These are the most frequent type of gap and typically occur during periods of consolidation. They often get filled quickly.
  • Breakaway Gaps: Signaling the start of a new trend, these gaps mark a departure from a consolidation pattern.
  • Runaway Gaps: Indicating strong continuation of an established trend, these are the focus of this article.
  • Exhaustion Gaps: Signaling the end of a trend, often followed by a reversal.

Characteristics of a Runaway Gap

Runaway gaps are distinct from other gap types due to several key characteristics:

  • Trend Continuation: The most defining characteristic. A runaway gap occurs *within* an existing trend, not at the beginning (like a breakaway gap) or end (like an exhaustion gap).
  • High Volume: Runaway gaps are typically accompanied by a substantial increase in trading volume. This confirms the strength of the move and suggests broad market participation. Low volume gaps are generally less reliable. Checking volume analysis is essential.
  • Significant Price Movement: The price movement associated with a runaway gap is usually substantial, often representing a significant percentage of the asset’s price.
  • Often Occurs Mid-Trend: These gaps don't initiate the trend; they accelerate it. The asset has already been trending for a period *before* the gap appears.
  • Relatively Long Duration: Unlike common gaps, runaway gaps are less likely to be filled quickly. The price tends to continue moving in the direction of the gap for an extended period.

Formation of a Runaway Gap

Runaway gaps form when strong momentum drives the price of an asset rapidly in one direction. Several factors can contribute to this:

  • Positive News or Events: Favorable news reports, analyst upgrades, or positive economic data can fuel buying pressure and create a runaway gap upwards.
  • Negative News or Events: Conversely, unfavorable news, analyst downgrades, or negative economic data can trigger selling pressure and create a runaway gap downwards.
  • Breakout of Key Levels: When the price breaks through significant resistance or support levels, it can trigger a runaway gap. This is often amplified by stop-loss orders being triggered, adding to the momentum. Fibonacci retracements and pivot points are useful for identifying these levels.
  • Momentum Trading: As the price starts to move strongly in one direction, momentum traders jump in, further accelerating the move and contributing to the gap formation.
  • Short Covering (in Uptrends): If a significant number of traders are short the asset, a rising price can force them to cover their positions (buy back the asset), adding to the buying pressure and creating a runaway gap.
  • Long Liquidation (in Downtrends): Conversely, if many traders are long the asset, a falling price can force them to liquidate their positions (sell the asset), adding to the selling pressure and creating a runaway gap.

Identifying a Runaway Gap

Identifying a runaway gap requires careful chart analysis. Here’s a step-by-step guide:

1. Identify an Existing Trend: First, confirm that a clear uptrend or downtrend is already established. Use moving averages, trendlines, and other technical indicators to confirm the trend. A 50-day and 200-day moving average crossover can be particularly helpful. 2. Look for a Gap: Scan the chart for a gap – a noticeable space between the closing price of one period and the opening price of the next. 3. Check Volume: Ensure that the gap is accompanied by a significant increase in trading volume. Compare the volume on the day of the gap to the average volume over the preceding period. A volume spike of at least 50% is a good indicator. 4. Confirm Price Movement: Verify that the price moved substantially in the direction of the gap. Consider the magnitude of the price change relative to the asset’s typical volatility. Average True Range (ATR) can help assess volatility. 5. Analyze the Context: Consider any news or events that may have occurred around the time of the gap. This can help you understand the underlying cause of the price movement. Reviewing an economic calendar is crucial. 6. Look for Continuation: After the gap, does the price continue to move strongly in the direction of the gap? This is the final confirmation that it is, indeed, a runaway gap.

Trading Runaway Gaps: Strategies and Considerations

Trading runaway gaps can be highly profitable, but it also requires careful risk management. Here are some common strategies:

  • Gap Trading (Continuation): The most common strategy. Enter a long position (buy) after a runaway gap upwards, or a short position (sell) after a runaway gap downwards, anticipating continued movement in the same direction. Place a stop-loss order just below the low of the gap (for long positions) or just above the high of the gap (for short positions). Candlestick patterns can help refine entry points.
  • Breakout Confirmation: Use the runaway gap as confirmation of a breakout from a consolidation pattern or key level. If the gap breaks through a resistance level, it signals a strong bullish signal.
  • Trailing Stop-Loss: As the price moves in your favor, adjust your stop-loss order to lock in profits and protect against potential reversals. A trailing stop-loss is a useful tool for this.
  • Target Setting: Estimate a price target based on the size of the gap and the strength of the trend. Some traders use the gap’s height to project a potential price target. Elliott Wave Theory can provide more advanced target setting techniques.
  • Volume Confirmation: Always confirm that the volume remains high as the price moves after the gap. A decline in volume may signal weakening momentum.
  • Avoid Chasing Gaps: Don't blindly jump into a trade immediately after a gap forms. Wait for confirmation of continued momentum before entering a position. A retest of the gap level can provide a lower-risk entry point.
  • Risk Management: Always use appropriate risk management techniques, such as setting stop-loss orders and limiting your position size. Never risk more than you can afford to lose. The risk-reward ratio should be favorable.

Runaway Gaps vs. Other Gap Types

It’s crucial to distinguish runaway gaps from other gap types:

| Gap Type | Formation | Volume | Trend Association | Implication | |----------------|---------------------------------------------|------------|-------------------|-------------------------------------------| | Breakaway Gap | Starts a new trend, breaks from consolidation | High | Beginning | Signals a potential trend change | | Runaway Gap | Occurs within an existing trend | Very High | Continuation | Signals strong trend continuation | | Exhaustion Gap | Signals the end of a trend | High/Declining| End | Signals a potential trend reversal | | Common Gap | Occurs during consolidation | Low | None | Often filled quickly, less significant |

Limitations and Considerations

While runaway gaps are powerful signals, they are not foolproof.

  • False Gaps: Occasionally, a gap may appear to be a runaway gap but is followed by a reversal. This can happen if the underlying fundamentals are weak or if the market sentiment changes unexpectedly.
  • Gap Fills: Although less common than with other gap types, runaway gaps can sometimes be “filled” – meaning the price retraces to close the gap.
  • Market Conditions: Runaway gaps are more common in volatile markets. In quiet or range-bound markets, they are less likely to occur.
  • News Sensitivity: Be aware of upcoming news events or earnings reports that could impact the asset’s price. These events can create unexpected gaps. Using a heat map can help identify potential volatility.
  • Correlation: Consider the correlation between the asset and other related assets. A runaway gap in one asset may be influenced by movements in others. Intermarket analysis can be useful.

Tools and Indicators for Identifying Runaway Gaps

Several tools and indicators can assist in identifying and trading runaway gaps:

By mastering the understanding and application of these tools and strategies, traders can significantly improve their ability to capitalize on the powerful signals provided by runaway gaps. Remember continual learning and adaptation are vital in the dynamic world of financial markets. Utilizing backtesting to refine your strategies is also highly recommended.


Technical Analysis Chart Patterns Trading Strategies Risk Management Candlestick Patterns Moving Averages Volume Analysis Support and Resistance Fibonacci Retracements Day Trading


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