Identifying Gaps | Techniques for Spotting Gaps

Regularly, the financial markets move their prices across determined phases as the traders' sentiment dictates the next direction of an asset. Within these phases, the magnitude of price changes can cause disparities between the speed at which the market processes and coordinates sellers and buyers. 

What are these disparities? How do they affect the opening and closing prices? How do they occur in the cryptocurrency market? Can traders anticipate and spot them? 

This article aims to solve these issues from a crypto trader’s perspective.

What Is A Gap In Markets

If you, as a trader, have been looking at price charts for some time, you have probably seen "empty" areas on a chart. Those empty areas are known as gaps among traders.

The technical definition of a gap states that it is an area on an asset price chart where the price quotation moves sharply, leaving no time for that price zone to execute an order.

Simply put, there has been no trading between the last closing price of the candle and the opening price of the next candle.

Not-to-fill and To-fill

Such a strong movement leaves no room for the price action between buyers and sellers to coordinate, causing not-to-fill an order, but leaves a to-fill area.

Those not-to-fill and to-fill affairs are essential to spot a gap. They indicate traders were not able to trade at that price level. This event may lead us to ask several questions:

1. What are the causes of such a situation?
2. How can traders spot gaps in advance?
3. How can traders take advantage of them?

By answering these questions, traders can gain insight into spotting those gaps and what techniques to employ.

Crypto Volatility as a Cause for Gaps

Traditionally, the concept of gap emerged from the stock market, where factors such as reports on earnings and market opening and closing (among others) cause ups and downs spikes in the price of an asset.

Still today, that is a typical occurrence in that market. However, in the cryptocurrency space, there are no earning reports, and the crypto market never sleeps.

There are two correlated elements that can play a role in crypto market gaps:

1. Liquidity.
2. Volatility.

High-liquid markets tend to be less volatile, while low-liquid markets tend to be the opposite.

In the case of high-capitalization assets like Bitcoin and Ethereum, volatility tends to vary as big players like institutions and whales enter the market.

For example, if a whale induces a selloff, the price declines sharply, but as long as there are buyers providing liquidity and absorbing that selloff, the price will go across all the available order quotes, presenting a continuous move. However, within that continuous move, there are chances for a gap, and indeed, they occur, but with very little impact.

Now, in the case of low-capitalization assets like unknown new tokens, meme-coins, etc., volatility tends to be extremely high as those markets are less liquid, where the price can basically jump from one quote to another.

Something interesting happens in futures trading with those less liquid assets. If an operator has enough capital and leverages too much, it will be able to move the price sharply (like a whale). Consequently, when that operator closes its position the price will move again. This unveils how pump-and-dump schemes work behind the curtains, which essentially concatenate the three gap types:

1. Breakaway Gap: A range breakout towards the pump, leaving a no-to-fill area.
2. Runaway Gap: The pump in action.
3. Exhaustion Gap: The last burst before the dump, going to-fill the breakout area.

That last paragraph is proof of how liquidity and volatility work together as a potential cause for gaps appearing in the crypto charts. This is the intrinsic dynamic among other factors that influence sharp market movements, such as:

• Impact news
• Market sentiment shifts
• Technical Factors

The same charts of 1000BONK pairs USDC vs. USDT. (The USDT pair does not show gap since the volume in BTC at the time of writing is 1.49K BTC for USDT while in USDC is 43.83 BTC)

Spotting Gaps: Identification According to Market Conditions

Spotting a gap can be as easy as looking for an area where there is no trading, leaving a space between a candle and another. This would be a common gap.

But as we mentioned in a previous section, there are three primary types of gaps:

1. Breakaway Gap
2. Runaway Gap
3. Exhaustion Gap

These gaps essentially belong to each phase in a whole potential market movement, within trends, ranges, and reversals. To spot gaps, crypto traders need to identify the current market conditions that influence the price changes.

Some questions can help solve this case:

• Is it the market on an intraday trend?
• Is it on a range?
• Is there momentum happening?

By identifying the market conditions, traders can start looking for gaps. How? Let's see:

• If the market is in a trend, traders can look for a previous area where a breakout of a range occurred since breakouts are typical movements of breakaway gaps.
• In the middle of the trend, traders can look for runaway gaps as this type is characteristic of momentum and ongoing trends.
• What about range conditions? Typically at the end of a trend, the market consolidates. During this consolidation, an exhaustion gap may occur. It indicates a potential reversal.

Techniques To Overcome Gap-Spotting Challenges

When spotting gaps, some challenges can emerge, related to confirmation of the gap's strength or reliability. To overcome these challenges, traders can employ techniques such as the following:

• Volume analysis: It may help traders determine market participation. Generally, the rule is that there should be increasing volume during a runaway gap and breakaway gap, while volume should decrease during an exhaustion gap. This implies continuation moves.
• Support and resistance: Key levels of support or resistance levels suggest the likelihood of an area being filled after a gap ends its move, as key levels indicate areas of supply and demand. This implies reversal moves.

Conclusion

When the orders between sellers and buyers do not match, there is likely to emerge a gap in the price chart as a consequence of a disparity between the opening a closing price of a determined period. A gap is essentially an area of zero trading in. Three gaps appear according to each market condition regarding trends, ranges, and reversals. Traders can spot them to anticipate further "filling" moves.

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