What is: Runaway Gap

What is: Runaway Gap

A runaway gap is a type of gap that occurs in the price chart of a financial asset, such as a stock or currency pair. It is characterized by a large gap between the closing price of one trading session and the opening price of the next session. Runaway gaps typically occur during strong uptrends or downtrends and are often seen as a continuation pattern.

In technical analysis, runaway gaps are considered to be a sign of strong momentum in the direction of the trend. Traders and investors pay close attention to runaway gaps as they can provide valuable information about the future direction of the price movement.

One of the key characteristics of a runaway gap is that it is not usually filled in the near term. This means that the price does not retrace back to fill the gap in the days or weeks following the formation of the gap. Instead, the price continues to move in the direction of the trend, confirming the strength of the trend.

Traders often use runaway gaps as a signal to enter or exit trades. For example, if a runaway gap occurs during an uptrend, it may signal a buying opportunity as it indicates that the uptrend is likely to continue. Conversely, if a runaway gap occurs during a downtrend, it may signal a selling opportunity as it indicates that the downtrend is likely to continue.

It is important to note that runaway gaps are not always easy to spot, as they can be confused with other types of gaps. Traders and investors should use other technical indicators and analysis tools to confirm the presence of a runaway gap and make informed trading decisions.

In conclusion, runaway gaps are a powerful tool in technical analysis that can provide valuable insights into the strength and direction of a trend. By understanding how to identify and interpret runaway gaps, traders can improve their trading strategies and increase their chances of success in the financial markets.