Some of the best articles I've ever read on Gaps are from Hard Right Edge:
This Opening Gap study by Brett Steenbarger is well worth the read. Brett measured the gap relative to the prior day's volatility (HL range) and found some interesting statistics.
Plenty of strategies and techniques in there if you find that you are a gap-o-phile! Like learning any technique, try one at a time, identify them on charts, and usE them repeatedly until they become intuitive.
From amg's Chart Vault
On daily and higher time frame charts, I will mark both the Hi/Lo 'lap' area where, if viewing price as candles, the shadows overlap; and the true gap, called a 'window' in candle terms, the area between the candle real bodies. In the articles above, the Open/Close reference is what hardrightedge.com calls "hole in the wall".
In my experience, the Open/Close prices are most useful. The tail/lap area already experienced price-testing and so there is less of a "need" to retest the zone. A true gap, on the other hand, has had no price testing and thus is a strong area for future "gap echo" action, as well as providing an area of support for a continuation move.
On intraday charts, I personally find the Hi/Lo lap area less useful as one can drill down in the time frame and find that price has indeed been tested, ie, a lap-gap on a 5m-chart will be far smaller than the lap-gap on a 15m-chart. So, when considering trading the day-session open, I find the Open/Close prices of far more interest.
Having marked the gap, the next thing to do is to determine the type of gap:
- common (most intraday gaps are of this type)
- breakaway (also, a "signal" gap, ie, signal of a move beginning)
- continuation (often a "measured" gap, ie, mid-point of a move)
- exhaustion (often the third gap of a sequence)
Lines, Color Bars, Circle
There are many ways to mark gaps. A simple one uses the Line tool in two colors, as follows. I turn on "Color Bars - Gaps" as an extra aid in finding the gaps. Big gaps can also be marked using the Circle draw tool (prop window below).
Another uses the "Circle" tool. I default this tool to a Rectangle as I rarely use circles, but you can also copy the props to one of the tabs.
This chart has a fairly detailed to go along with it.
Original Summary Article: April 2006