Common Gap Strategy

• A common gap represents a price gap that occurs on average trading volume and does not represent a new multiweek price high or low. Common gaps are usually quickly filled -- either the same day or within the next few days. This means that the price will work its way up or down to close the price gap. When a common gap down occurs, gap traders buy the stock with the intention of selling when the price closes the gap.
  
  

Breakaway Gap Strategy

• Sometimes a stock will trade in a narrow price range for several days to several weeks. For example, stock XYZ might range between $20 and $21, rising when it reaches $20, and falling back when it reaches $21. A breakaway gap occurs when the price gaps above or below a price range on noticeably higher trading volume. This type of gap can signal a new price trend in the direction of the gap. Thus, when a breakaway gap occurs to the downside, gap traders sell the stock short soon after the gap occurs. Selling a stock short is a method of selling stock you do not own with the obligation of returning it at some point in the future. If you can buy the stock back for less money than you sold it for, you profit from the difference.
  
  

Continuation Gaps

• A continuation gap occurs in the middle of a price trend. When a stock price has been steadily falling for several days to several weeks, a continuation gap can sometimes occur, leading to a fresh leg lower in the downtrend. Like a breakaway gap, a continuation gap occurs on noticeably increased trading volume and the gap is not quickly filled. When a continuation gap occurs in a downtrend, gap traders sell the stock short soon after the gap occurs.
  
  

Exhaustion Gaps

• An exhaustion gap occurs after the price has been in an up- or downtrend for a period of time. Like a continuation gap, an exhaustion gap occurs on above-average volume. An exhaustion gap signals that the trend is ready to reverse and the price usually closes the gap over the next day or two. It can be very difficult to distinguish the difference between a continuation gap and an exhaustion gap. If the price closes the gap over the next few days, gap traders buy the stock in anticipation of continued higher prices.