In the world of Japanese candlesticks, there are a number of bullish and bearish continuation patterns. The Japanese insight is, "there are times to buy, times to sell, and times to rest." Most continuation patterns suggest a trend is exhibiting a temporary diversion in behavior and will eventually continue on its existing trend.
A «gap» is a price void i.e. the situation when the minimum price of the current bar is higher than the maximum price of the preceding candle, or when the maximum price of the current candle is lower than the minimum price of the preceding candle. To «close the gap» means to fill the price void.
A position should be open in the direction shown by the «gap».
Later «gaps» become resistance and support areas. If during a retracement the «gap» is closed but the pressure of the trend’s rivals doesn’t decrease it will lead to the reversal of the trend.
As a rule after the appearance of a price void prices return to the «gap», and this is a good moment to open a position. Stop Loss orders should be placed under (above) the gap in case of an open buy (sell) position.
«Gaps» after standstill areas deserve special attention.
- The rules of «gaps» analysis:
- If after the appearance of a «gap» eight-ten rising highs (falling lows) are registered and correction doesn’t start it will start in the nearest future. The Japanese say about such market: «The stomach is 80% full».
- If a «gap» hasn’t closed during three bars the market will go in the direction of the «gap».
- After the appearance of three gaps up (down) the top (bottom) should be expected. If after the third gap a reversal pattern occurs the probability the trend will end is higher.
