What Is a Runaway Gap?
A runaway gap, typically seen on charts, occurs when trading activity skips sequential price points, usually driven by intense investor interest. In other words, there was no trading, defined as an exchange of ownership in a security, between the price point where the runaway gap began and where it ended.
- A runaway gap, typically seen on charts, occurs when trading activity skips sequential price points, usually driven by intense investor interest.
- Market technicians have theorized that runaway gaps often occur after a security has experienced a breakaway gap.
- The psychology behind a runway gap is that traders, who did not get in during the initial move, get tired of waiting for a retracement to join what they perceive to be a trending market and jump in en masse.
Understanding Runaway Gap
In general, gaps in a security’s price will occur when the price makes a significant spike in either an upward, or downward direction. A runaway gap is one of several gaps that may occur during a trend. This type of gap, best viewed on a price chart, occurs during strong bull or bear moves, and is characterized by a significant price change in the direction of the prevailing trend.
During a trend, a security’s price may experience several runaway gaps which can help to reinforce the trend’s direction. Market technicians have theorized that runaway gaps often occur after a security has experienced a breakaway gap, as the probability of an unexpected event, typically a news story, that can promote the existing trend, rises.
The psychology behind a runway gap is that traders, who did not get in during the initial move, get tired of waiting for a retracement, to join what they perceive to be a trending market, and jump in en masse. This sudden buying or selling interest happens in a flash, usually catalyzed by an unexpected news story, which forces the market maker to place bids/offers at price points that are farther away from the last traded price prior to the gap forming. The eagerness of traders to engage, sometimes bordering on panic, leads them to trade at these wide price levels, which results in the security's price jumping up, or down, leading to the formation of the runaway gap.
Gaps can be an important price signal for a technical trader as they signify a substantial change in a security's price from one trading period to the next. Therefore, gaps will tend to provide micro-insights for observations over a very short period of time since they are formed from the combination of two consecutive candlestick patterns. Generally, a gap is characterized by a 5% increase from the previous closing high of an up candlestick to the new opening price of the next candlestick, or a 5% decrease from the previous closing low of a down candlestick to the new opening price of the next candlestick.
Traders can follow candlestick patterns in a wide range of increments ranging from one minute to one year, or higher. Therefore, gap signals, or patterns, can be more, or less, reliable based on the time increments in which they are formed.
Runaway Gap Formation
A runaway gap will typically occur in the midst of a trend, be it up or down. It is normally defined as a gap of 5% or more that occurs in the direction of a current trend. It is characterized as a runaway gap because of the timing of its occurrence. It is also typically associated with high trading volume supporting the spike in price. The chart below shows a runaway gap in the middle of a large upward move.
Trends and Runaway Gaps
Bullish and bearish trends usually follow trading cycles that, commonly, include breakaway gaps, runaway gaps, and an exhaustion gap. All of these gaps are identified by the aforementioned 5% price change criteria, but they are differentiated by the timing of their occurrence.
A breakaway gap will typically occur to support the indication of a trend reversal. It may follow a peak resistance pattern, or a trough support pattern. As a security's price begins to follow a bullish or bearish trend, the market environment will be ripe for several runaway gaps. Runaway gaps are usually accompanied by high trading volumes, which would support investor confidence in the direction of the trend. Runaway gaps can be seen as added proof that the current trend is viable.