What is Common Gap
A common gap is a price gap found on a price chart for an asset. These gaps are brought about by normal market forces and, as the name implies, are very common. They are represented graphically by a non-linear jump or drop from one point on the chart to another point.
BREAKING DOWN Common Gap
In general, there is no major event that precedes this type of gap. Common gaps generally get filled relatively quickly (usually within a couple of days) when compared to other types of gaps. Common gaps are also known as "area gaps" or "trading gaps."
Common gaps provide no significant analytical insight, and are small, meaning the price difference between the two gapping bars is not significant. Common gaps occur frequently in stocks from one day to the next, and in currency markets over the weekend.
Common gaps are typically, but not always, "filled." For example, if a stock closes at $50 on Monday, and then opens at $50.25 on Tuesday, the price will often move back to $50 within the next few days. If the price goes back to where the gap started, technicians consider the empty space filled.
Common Gaps vs. Other Types of Gaps
By contrast, a breakaway gap shows decisive movement out of a range or other chart pattern. These types of gaps are most commonly associated with heavy volume, in that it shows the strong conviction of the breakaway price movement. Breakaway gaps are most commonly associated with major news events or earnings announcements in individual stocks, which rapidly change investor sentiment.
Once a trend starts and has been underway for a while, more traders start hearing about it. Any positive news or catalyst brings in traders who have been 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. These types of gaps are also typically associated with a volume increase, but lots of volume isn't as important here as it is with breakaway gaps. Runaway gaps signal a continuation of the trend. Traders already in positions will view the event as a sign to hold the trade longer. Those on the sidelines may want to get in as there is likely more room for the price to run. While this can be a favorable entry, it is not as favorable as entering after a breakaway gap.