What is a Runaway Gap
A runaway gap is a type of gap on a price chart that occurs during strong bull or bear movements. It is characterized by a significant change in price in the direction of a trend. During a trend, a security’s price may show several runaway gaps which can help to reinforce the trend’s direction.
BREAKING DOWN Runaway Gap
A runaway gap is one of several gaps that may occur during a trend. In general, gaps in a security’s price will occur when the price makes a significant movement in either a positive or negative direction from one trading time period to the next.
Gaps can be an important price signal for a technical trader as they signify a substantial change in 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 a green candlestick to the new opening price of a consecutive green candlestick or a 5% decrease from the previous closing low of a red candlestick to a consecutive red candlestick opening price.
Traders can follow candlestick patterns in a wide range of increments ranging from minutes to hours or days. 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 an up or down trend. A runaway gap is a gap of 5% or more that occurs in the direction of a trending price. It is characterized as a runaway gap because of the timing of its occurrence. It is also typically associated with high volume trading supporting the gap.
The image shows a gap in the middle of a large upward movement.
Trends and Runaway Gaps
Runaway gaps occur during a bullish or bearish market trend. These trends usually follow trading cycles that will include a breakaway gap, several runaway gaps and an exhaustion gap. All of these gaps follow the same 5% price change methodology however they are characterized 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 price begins to follow a bullish or bearish trend, the trend will typically include several runaway gaps. The runaway gaps are usually accompanied by high volumes of trading which support the market’s price sentiment in the direction of the trend. Runaway gaps can help to provide added conviction for a trading strategy that is seeking to profit from a trend’s price direction.