chart, ta thread., page-8

Basicly gaps are created by a significant change in what is happening with the security. The Japanese call gaps windows. So a gap up is a "rising window" a bullish indicator. A gap down a "falling window" is a bearish indicator.

If you look at the work of Edwards & Magee they had this to say.


there soon accumulated a welter of ‘rules’ for their
interpretation some of which
have acquired an almost religious force and are cited by the superficial chart
reader with little understanding as to why they work when they work (and, of
course, as is always the case with any superstition, an utter disregard of those
instances where they don’t work).

Edwards and Magee, 1966, p 190



The many different types of gaps include Common, Breakaway, Continuation, Exhaustion, Double gaps, Explosion gap pivots & Island reversals. These all have their own unique trading strategies. It’s not necessary to know all the gap types, but it is necessary to know what gaps offer profitable trading strategies. It should be kept in mind that a gaps tendency to close is directly proportional to it’s size.

A survey conducted on the Russell 3000 over a four year period on securities with over a million shares on gap day. Found that 20.611 gap ups occurred and 17.435 gap downs occurred with 1,259 trading days. This highlights that gaps are a profitable trading strategy.