A continuation gap, also known as a runaway gap, is a technical analysis pattern that occurs in the middle of a strong trend when the price of an asset moves significantly in the same direction with a gap between consecutive trading sessions. This gap typically indicates that the current trend is likely to continue as traders and investors maintain strong momentum.

Understanding Continuation Gap

A continuation gap represents increased enthusiasm or confidence among traders in an ongoing trend, either bullish or bearish. It often occurs during periods of high trading volume and is seen as a signal that the trend will persist.

For example:

• In an uptrend, the price gaps up, opening significantly higher than the previous close, indicating strong buying interest.
• In a downtrend, the price gaps down, opening significantly lower than the previous close, reflecting strong selling pressure.

Characteristics of a Continuation Gap

• Location: Appears in the middle of a trend (unlike breakout gaps, which appear at the beginning).
• Volume: Accompanied by a surge in trading volume, confirming market participation.
• Trend Confirmation: Indicates that the current trend is likely to persist rather than reverse.
• No Filling: These gaps are usually not “filled” (i.e., the price doesn’t return to the gap level) until the trend ends.

Common Challenges Related to Continuation Gaps

• False Signals: Gaps in low-volume markets may not indicate a continuation but could result in a reversal.
• Market Volatility: Gaps during highly volatile periods can be misleading, as they may result from short-term noise.
• Identification: Differentiating between a continuation gap and other types of gaps (e.g., exhaustion or breakout gaps) can be challenging.

Step-by-Step Guide to Trading Continuation Gaps

1. Identify the Trend: Ensure the price is already in a strong, established trend (upward or downward).
2. Look for the Gap: Spot a noticeable gap where the price opens significantly higher or lower than the previous close.
3. Check Volume: Confirm the gap with a spike in trading volume, indicating strong market participation.
4. Use Technical Indicators: Combine the gap with indicators like RSI or MACD to confirm the trend’s strength.
5. Set Entry Points: Enter a trade in the direction of the trend after the gap is confirmed.
6. Manage Risk: Place stop-loss orders below the gap (in an uptrend) or above the gap (in a downtrend) to protect against reversals.
7. Monitor the Trend: Continuously assess the strength of the trend and adjust positions as necessary.

Practical and Actionable Advice

• Avoid Low-Volume Gaps: Ensure the continuation gap is accompanied by significant trading volume to confirm its validity.
• Use Multi-Timeframe Analysis: Check for continuation gaps across different timeframes to validate the trend’s strength.
• Combine with Other Patterns: Look for supporting patterns, such as candlestick formations or breakout levels, for additional confirmation.
• Be Patient: Wait for the gap to be sustained over a few sessions before entering a trade to avoid false signals.
• Set Realistic Targets: Use tools like Fibonacci extensions or previous highs/lows to set profit targets.

FAQs

What is a continuation gap?
It is a gap that occurs in the middle of a trend, indicating that the current trend is likely to continue.

How does a continuation gap differ from other gaps?
Unlike breakout gaps (at the start of a trend) or exhaustion gaps (at the end of a trend), continuation gaps occur mid-trend.

Can continuation gaps appear in both bullish and bearish trends?
Yes, they can occur in both upward and downward trends.

What does high volume indicate in a continuation gap?
High volume confirms strong market participation, validating the gap and the trend’s strength.

Are continuation gaps always reliable?
No, they can sometimes produce false signals, especially in low-volume or volatile markets.

How do I know if a continuation gap won’t be filled?
Continuation gaps typically remain unfilled as long as the trend persists, but market reversals can cause filling.

What is the best timeframe to spot continuation gaps?
Daily charts are often used, but gaps can also appear in shorter or longer timeframes depending on trading style.

Can I use technical indicators with continuation gaps?
Yes, indicators like RSI, MACD, or moving averages can confirm the trend’s strength.

What should I avoid when trading continuation gaps?
Avoid trading gaps with low volume or those occurring in unclear or choppy trends.

How do I manage risk when trading continuation gaps?
Set stop-loss levels near the gap area to minimise losses in case of a reversal.

Conclusion

A continuation gap is a powerful indicator of a strong trend, offering traders an opportunity to capitalise on sustained momentum. By identifying these gaps in established trends, confirming with volume, and applying sound risk management, traders can use continuation gaps as part of a robust trading strategy. However, it’s essential to avoid low-volume or volatile gaps that may lead to false signals.