Exhaustion Gap

Exhaustion Gap: Definition and Trading Strategy Examples In Technical Analysis

An exhaustion gap can signal an upcoming trend reversal, but recognizing and acting on this shift is where the challenge lies. This article slices straight to the heart of exhaustion gaps, explaining their significance in market movement and might provide actionable trading ideas for traders.

Moreover, we’ll give you statistics, data, and facts, which we did by backtesting. Hopefully, you get more insights than other websites’ traditional anecdotal and boring descriptions.

Exhaustion Gap Definition and Trading Strategy

Table of contents:

Key Takeaways

  • An exhaustion gap is a significant technical pattern in trading that signals a potential trend reversal, characterized by a gap in price, higher trading volume, and the culmination of a sustained price movement.
  • Exhaustion gaps occur after an extreme price move and are caused by market overreactions; they often get filled when the price returns to pre-gap levels, adjusting for the initial imbalance between buyers and sellers. It’s based on the principles of maen reversion.
  • For effective trading strategies around exhaustion gaps, traders should confirm the presence of a gap followed by a strong indicator such as high volume, and manage risks with stop-loss orders, combining technical analysis for greater accuracy.
  • We provide historical evidence, statistics, numbers, facts, and performance via backtesting.

What is an exhaustion gap?

An exhaustion gap is recognized as a key technical indicator that typically indicates an imminent reversal in the prevailing market direction. It occurs when there’s a pivot in stock movement after continuous trending, suggesting that traders might be witnessing a pivotal shift within the market forces.

The image below is an example of an exhaustion gap:

What is an exhaustion gap
What is an exhaustion gap

After a few days of going lower, the price gaps down below yesterday’s low and stays there for all the day. Also, notice that the volume picked up, signaling that the sellers might exhaust themselves. We call this a bullish exhaustion gap.

Exhaustion gaps come in two varieties: bullish and bearish—both foretelling possible trend reversals. A bullish exhaustion gap emerges following significant downward price action and hints at declining momentum ahead.

Conversely, a bearish exhaustion gap materializes after notable upward price activity and suggests potential upward momentum change.

In either scenario, such gaps symbolize the waning of an existing move and signal to traders that it may be time to consider closing positions or initiating positions based on seeing this pattern with regard to trader exhaustions.

How do exhaustion gaps form?

Exhaustion gaps form as a consequence of disproportionate market reactions and disequilibrium. Manifesting typically through an abrupt surge in price that lacks fundamental backing, they create a substantial price gap.

This phenomenon is usually indicative of the transition from trend-driven trading to an acute awareness of risk among traders, who consequently place numerous sell orders en masse—causing the price to plummet. A graphical example is here:

How do exhaustion gaps form
How do exhaustion gaps form

When exhaustion gaps materialize, it often signifies collective trader behavior. In their rush to secure gains or abandon trades amidst insufficient risk evaluation, these traders can trigger hurried selling once momentum falters.

Following the appearance of an exhaustion gap, there is a reverse where stocks return to their pre-gap levels due to rebalancing between supply and demand forces. This also reflects the markets’ integration of updated pricing data. It’s based on the principles of mean reversion.

What causes an exhaustion gap to occur?

Exhaustion gaps typically occur as openings on the price chart following an accelerated and substantial move in prices, either up or down.

These gaps are frequently paired with a surge in trading volume, suggesting that the prevailing trend could be nearing its conclusion. Such spikes in trading volume often signal a turning point, indicating a possible change in the sentiment of the market.

Instances of exhaustion gaps were evident when examining Tesla Inc.’s September 2020 price movements (see below) and during Netflix’s summer 2018 performance. In these instances, sudden shifts both in price levels and accompanying trade volumes pointed towards exhaustion gaps.

Exhaustion gap Tesla strategy
Exhaustion gap Tesla strategy

To spot exhaustion gaps, one must review the price charts, looking for areas where there is a distinct divergence from established patterns—specifically spots where there is an observable departure from current pricing paths alongside unusually high trading activity.

Crafting a Trading Plan Around Exhaustion Gaps

Exhaustion Gap

Crafting a trading plan around exhaustion gaps entails a deep understanding of their distinct features. A strategy centered on exhaustion gap trading looks for indications that a price trend is nearing its conclusion, and it involves making trades based on these cues.

Traders leverage the specific traits of exhaustion gaps, such as significant jumps in price alongside high trading volume, to pinpoint possible entry points for trades. Further down in the article, we provide specific trading rules and backtest a gap trading strategy.

Once an exhaustion gap has been established, traders then proceed to initiate positions aligned with the direction suggested by the gap itself. In instances where there’s a bearish gap, initiating a short position would be appropriate.

Conversely, when faced with a bullish gap, going long becomes favorable. Employing this tactic when dealing with exhaustion gaps enables traders to take advantage of potential shifts in market momentum.

Are exhaustion gaps profitable?

Exhaustion gaps are profitable, but it depends on what kind of trading rules you are using. We use quantified trading rules and find exhaustion gaps to be profitable in the stock market.

Let’s give you an example for educational purposes:

Exhaustion gap trading strategy (bullish gap)

Let’s formulate 100% quantifiable trading rules to backtest exhaustion gaps. We use the following trading rules:

THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get Access Click Here To Get Access To Trading Rules

Let’s briefly explain the reasoning for our trading rules:

We want the price to be slightly oversold before today’s price action. Moreover, we want today’s price to gap down and never trade above yesterday’s low and on high volume. This is to “empty” the sellers and create a vacuum. When the sellers are finished, the price will increase. Finally, we want only to trade in a bull market, and we use the 200-day moving average to filter a bull market.

Let’s backtest the trading rules on the S&P 500 and its corresponding ETF, which has the ticker code SPY (from inception until today). We get the following equity curve if we sell after N-days after a buy signal was triggered:

Exhaustion gap example
Exhaustion gap example

There are not many trades even for such a backtest spanning many decades. Column one tells us that selling after five trading days, the average gain per trade is 0.79% per trade. The equity curve for selling after five days looks like this:

Exhaustion gap return and performance
Exhaustion gap return and performance

There are long periods without trades, but the trading performance and metrics are good.

Do exhaustion gaps work in the opposite direction, i.e., on short? Unfortunately, short is extremely difficult to trade in the stock market because of the long-term tailwind in the form of inflation and productivity gains. The stock market increases over time, and you must carefully fight that trend.

However, let’s backtest a potential short strategy based on the exhaustion gap pattern:

Exhaustion gap trading strategy (bearish gap)

Let’s backtest a potential exhaustion gap trading strategy based on shorting. We make the following trading rules:

THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get Access Click Here To Get Access To Trading Rules

If the trading rules are true and it triggers a short trade, we get the following results for Tesla since its inception until today when we sell at the close the next day:

Bearish exhaustion gap trading strategy
Bearish exhaustion gap trading strategy

There are not many trades, only 28, but the average gain is 1.9%. You can use the pattern on many other stocks to get more fills, but it needs to be backtested.

What significance does an exhaustion gap hold in trading?

Exhaustion gaps are significant in trading, presenting numerous strategic opportunities. Options trading can be particularly beneficial when dealing with exhaustion gaps due to their ability to offer high leverage on price movements while concurrently capping potential losses at the premium spent. However, implied volatility likely increases when an exhaustion gap forms, increasing the option premium, so you must be careful. Always backtest your trading ideas!

Futures contracts also play a key role by enabling traders to backtest trading strategies about future asset prices, where correctly predicting the outcomes following an exhaustion gap can lead to leveraged profits. However, trading is a balance of risk and reward, and many traders have failed due to being overleveraged.

Equally critical is the utility of bearish exhaustion gaps within short selling strategies. Recognizing such a gap presents an opportunity for traders looking to capitalize on anticipated declines in stock prices.

When engaging in short selling based upon a bearish exhaustion indication, it’s common practice for traders to implement tight stop-loss orders just above the gap as risk management should trends persist rather than reverse. However, we have yet to find evidence that a stop loss improves your overall trading performance. On the contrary, you are more likely to underperform. Please read our extensive article on the pros and cons of a stop loss.

How can I distinguish an exhaustion gap from other gap types?

You distinguish an exhaustion gap from other types of gaps by looking at the price action before the gap: A bullish gap happens after a downturn, and a bearish gap occurs after the price has gone up. You want to fade the gap based on mean reversion.

A bearish exhaustion gap, for instance, might occur after a bullish trend and a subsequent bullish gap but then show signs of a bearish reversal—this suggests that the upward momentum could be losing steam.

How can I identify an exhaustion gap on a price chart?

You identify an exhaustion gap on a price chart by looking for a trend where the current bar has opened down or up and traded on increased volume.

Examining a price chart for signs of an exhaustion gap involves looking at multiple signals and hints. This type of gap is often the result of a stock’s price experiencing a swift escalation over several days (perhaps weeks) and typically presents itself as a downward departure in prices on the daily chart. It indicates a notable transition from purchasers to sellers, frequently aligned with decreased interest in acquiring the stock, suggesting that an existing upward trend might be drawing to its conclusion.

When pinpointing an exhaustion gap, one should search for increased trading volume coupled with a considerable separation between the prior day’s lowest value and that of the subsequent trading session’s peak value (for a bullish gap).

On a price chart, look for space where no transactions happened—that would occur between one time period’s closing valuation and another’s opening valuation—this blank area confirms your observations about market activity surrounding potential exhaustion gaps. Even better is to look at high and low values.

Can exhaustion gaps occur in both bullish and bearish trends?

An exhaustion gap occurs in both bullish and bearish trends, but you need to filter the trend into short and long term. You can have a reversal after a short-term negative trend in a bull market, and you can spot a positive short-term trend in a bearish market. There are no hard rules, all you need to do is to use sound trading ideas and backtest them.

In contexts where the market has been experiencing an extended period of price climbs, the presence of an exhaustion gap suggests that buyer momentum may be waning, opening up the possibility for a shift to a bearish reversal.

Conversely, following substantial downward movements in prices within a bearish market scenario, an exhaustion gap indicates that seller energy might be diminishing and sets up expectations for an upcoming bullish reversal.

These exhaustion gap patterns are distinct due to their considerable price separation coupled with increased trading volumes—an indication of substantive changes in investor sentiment.

What is the typical volume pattern associated with an exhaustion gap?

The typical volume pattern associated with an exhaustion gap is one with increased volume, where the trading activity reaches an above-average level. On the day when this type of gap takes place, there’s a marked increase in trading volume compared to previous sessions.

This spike in trade quantity during an exhaustion gap signals that the pool of either buyers or sellers might be depleted, which can foreshadow a reversal in the prevailing price trend (it creates a vacuum). Such a pronounced transition from buying to selling pressure—or vice versa—implies that the current trend could be approaching its conclusion.

Traders pay close attention to these patterns in volume as they might offer extra validation for identifying an exhaustion gap and assist them with their market strategies.

How reliable are exhaustion gaps as a signal for trend reversal?

Exhaustion gaps are reliable as a signal for trend reversal – all based on data and statistics from our own research. In the backtest we did in this article, we found exhaustion gaps to be reliable around 72% of the time. We base this on the win rate.

Exhaustion gaps may signal impending trend reversals, suggesting that the market momentum from buyers or sellers is dwindling and the prevailing demand isn’t sufficient to maintain control over market direction. This could indicate an upcoming change in the current trend.

The degree of trust one can place in exhaustion gaps as indicators for potential trend reversals can be influenced by trading volume. A higher volume might lend more credence to such a gap,a nd this is confirmed by the bcktests we have run.

Analyzing market context alongside technical tools like RSI (Relative Strength Index) or EMA (Exponential Moving Average) can aid in assessing whether an exhaustion gap might lead to an actual reversal of trends. Moving averages are particularly useful for filtering trends, and it might pay off to have a deeper look at the 200-day moving average.

Are there specific candlestick patterns that often accompany exhaustion gaps?

The doji candlestick pattern has proven to work well in backtests to signal exhaustion gaps. We have quantified all 75 candlestick patterns, and dojis turned out to have a high win rate pinpointing reversals.

Traders seeking to pinpoint exhaustion gaps typically scrutinize certain candlestick formations as potential indicators. Despite the lack of universally recognized candlestick patterns associated with these gaps, they are frequently succeeded by a sizeable red or black-colored candle that signifies a significant sell-off occurring on the subsequent day, in addition to the doji patterns.

A typical characteristic of a candlestick following an exhaustion gap is its opening at a higher level and closing at a lower one, reflecting strong selling momentum. When traders combine analysis of such candlestick configurations with additional metrics like trading volume and price movement, their probability of correctly identifying exhaustion gaps can be considerably enhanced.

What risk management strategies should I employ when trading around exhaustion gaps?

The best risk management strategies to employ when trading exhaustion gaps is to trade small and make sure you have a positive expectancy based on backtesting. You want to trade small because you should have many uncorrelated trading strategies that complement your trading arsenal.

However, one risk management strategy is to utilize stop-loss orders to automatically sell a security when it reaches or falls below a specified price. This provides downside protection and predefined exit points. However, we have never found much use in using such arbitrary settings. Most backtests prove that this is not a viable strategy in the long run – you are better off diversifying.

Another strategy is to implement limit orders to buy or sell an asset at a specified price or better, offering control over the execution price and the opportunity to enter or exit a trade at a favorable price point. This is a valid risk management strategy.

Traders can also explore the use of put options as an alternative to stop-loss or limit orders. These grant the right to sell a specific number of shares at a predetermined strike price, thus offering protection against large price gaps.

However, traders should be aware of the costs and timing challenges associated with put options, and evaluate whether the benefits of gap risk elimination justify the premium paid for long-term protection. If you want to trade options, you need to be sure what you are doing; otherwise, you’ll be taken to the cleaners.

How do I differentiate between an exhaustion gap and a breakaway gap?

You differentiate between an exhaustion gap and a breakaway gap by looking at the trend and price action before the gap. Exhaustion gaps fade the trend, while runaway gaps go with the trend.

Exhaustion gaps manifest after a prolonged period of an upward trend in the price of stock, usually culminating with an abrupt downward gap accompanied by heightened trading volume – this signals that the buying momentum could be dwindling and suggests that there might be an impending shift to a downtrend.

Conversely, breakaway gaps are identified when prices leap across resistance or sink below support levels. These suggest not the termination but rather the commencement of a new directional trend.

Each category of price gaps serves as a distinct indicator within market analysis and bears unique consequences. Post-exhaustion gap activity typically disrupts established uptrend lines indicating potential reversals in trends while confirming traders’ anticipation for changes in direction.

In contrast, breakaways tend to diverge from previous pricing structures, implying robust beginnings for major ongoing trends. A deep understanding of such differences among gap types becomes indispensable for traders aiming at refined strategy execution within financial markets.

What is the importance of exhaustion gap in Technical Analysis?

Exhaustion gaps play an important role in technical analysis. They signal a potential change from an upward trend to a downward trend, marking a significant shift from buying to selling activity.

Recognizing exhaustion gaps on a chart can provide valuable insights into potential trend reversals. Here are some key characteristics of exhaustion gaps:

  • They occur after a prolonged upward trend.
  • They are characterized by a significant gap down in price.
  • They are accompanied by high trading volume.
  • They often indicate a period of selling pressure and a potential trend reversal.

The importance of identifying exhaustion gaps lies in their ability to imply that buyers are exhausted and do not have enough orders to counter the influx of new sellers entering the market.

Exhaustion gaps suggest that the last push in one direction is occurring before the security experiences a reversal, making them a crucial signal for traders forecasting trend reversals. Therefore, exhaustion gaps play a vital role in technical analysis, offering potential opportunities for profitable trades.

What are the key Characteristics of the Exhaustion Gap?

Several distinctive indicators characterize exhaustion gaps:

  • After a stock’s or index’s price has seen several days (or weeks) of rapid ascent, these are typically indicated by a downward break in price.
  • Such movement signals the transition from an inclination to buy towards selling, reflecting a decline in the stock’s demand.
  • An existing upward trend prior to the gap, along with considerable separation between prices on consecutive trading days and unusually high trading volume at the time of the gap formation are additional hallmarks.

The existence of an exhaustion gap suggests that there is a depletion of buyers’ momentum and insufficient incoming purchase orders to offset new sellers coming into play. It’s a vacuum. Commonly serving as harbingers for impending downturns in market trends, these gaps forecast declining prices in upcoming days or even weeks. For this reason, grasping these features is vital for traders aiming to pinpoint and effectively engage in trading associated with exhaustion gaps.

What are the advantages of Exhaustion gaps?

The advantages of exhaustion gaps are that you can initiate trades in the direction opposite to that of the prevailing movement with a high win ratio (based on statistics), you can pair them with other indicators, and they can be backtested.

When paired with technical indicators:

  • They bolster the ability to pinpoint and affirm prospective reversal points as well as price movements, hence sharpening one’s understanding of market dynamics.
  • These combinations support traders in defining exact moments for entering or exiting trades.
  • They are instrumental when creating trading tactics tailored towards taking short or long positions according to where they foresee market momentum heading.

In essence, exhaustion gaps serve as strategic signposts alerting traders about imminent finalizations in trend patterns before an expected pivot materializes.

What are the disadvantages of Exhaustion gaps?

The disadvantages of exhaustion gaps are that they can be difficult to quantify into trading rules, you are going against the trend, and bearish exhaustion gaps are not very profitable (based on data and statistics).

Identifying these gaps can be a challenge and there is often confusion with runaway gaps. Exhaustion gaps typically indicate that a price trend may be nearing its end, potentially giving way to a reversal in the trend that could lead to substantial losses if not properly foreseen.

It’s important to recognize that trend exhaustion gaps are only determinable after the fact when it becomes clear that the trend has not sustained itself. When such trends peak, it suggests that buyers may no longer have enough stamina to propel prices upward, indicating potential market fatigue. While trading opportunities linked with exhaustion gaps exist, traders must exercise caution considering these inherent limitations.

What Does It Mean That An Exhaustion Gap Get Filled?

Filling a gap means prices have returned to levels seen prior to the emergence of the gap.

Nevertheless, while many exhaustion gaps do get filled eventually, it is not guaranteed—reflecting variability in whether and when this may happen.

Do Exhaustion Gaps get filled?

Exhaustion gaps most likely get filled. For example, the bullish exhaustion gap we backtested above is filled 70% of the time within a few days. For bearish exhaustion gaps, the fill rate is much lower due to the nature of the markets.

Exhaustion gaps commonly indicate the conclusion of a price trend, with a high chance of being filled as they suggest that an upward trend has run its course. When this happens, changes in market sentiment can often drive prices back down to where they were before the gap occurred. Hence, the gap gets filled.

Despite their tendency to be filled, there’s no set period within which an exhaustion gap will be closed. It depends on how market conditions evolve and subsequent stock price action unfolds.

Is it possible for an Exhaustion gap to never be filled?

It’s possible that an exhaustion gap may never be filled, even though they typically are. Bearish exhaustion gaps are less likely to be filled compared to bullish ones. The chance of this occurring relies on several factors, such as the market conditions, the strength of the trend emerging post-gap, and the market direction.

An exhaustion gap accompanied by particularly high volume and a notable price shift can indicate a robust continuation in the same direction instead of reverting to fill the gap.

Contributors to an unfilled exhaustion gap include vigorous market sentiment, persistent movement in line with the direction of the initial gap, and substantial shifts in market dynamics reinforcing this new pricing level. Nevertheless, it’s worth noting that not being filled is quite uncommon for exhaustion gaps. More often than not, they do get filled eventually.

How To Trade Exhaustion Gaps?

There are no hard rules for how to trade exhaustion gaps. You need to make your own trading rules and backtest those to find the historical statistics and evidence of the past performance. It’s no guarantee of profitable future performance, but we believe it’s the best path to becoming a profitable trader.

Engaging in trades involving exhaustion gaps necessitates a profound comprehension of their defining traits and consequent effects. When setting out to trade these types of gaps, pinpointing the prevailing market trend is critical as the existence of a trend lends credibility to an exhaustion gap pattern.

Verification can be achieved by either recognizing a price gap moving in the counter-trend direction or witnessing price action breaching through the boundary of the opening gap range. Trades should then be executed according to whether an exhaustion gap is bullish, indicating long positions, or bearish for short positions.

To finalize trades associated with exhaustion gaps one may watch for completion of an equal measure move pertaining to that initial gap magnitude or instead observe ongoing price behavior alongside levels signifying support and resistance for those favoring strategies accepting higher degrees of risk.

Incorporationg technical tools like RSI allows traders entry points subsequent to recognition of anexhaustion gap. This can be done by identifying when overbought conditions—or conversely oversold—using RSI could signal impending changes in momentum reflecting potential reversals following such openings.

What trading strategy is good for exhaustion gaps?

A backtested trading strategy with specific trading rules is good for exhaustion gaps. Moreover, an established upward price trend over several days (or weeks or months) must be prevalent, followed by a significant pricing gap—typically around half the range of what would be considered an average trading day for that particular stock—or even larger.

The volume traded on the day when this gap occurs is vitally important. It should exceed the average. This higher volume is often interpreted as a pivotal shift from buyers being in control to sellers gaining upper hand. Traders are advised to initiate trades based upon these indicators, which may signal the onset of a downward momentum and signal potential sellers overtaking buyers—a precursor to possible trend reversal.

Incorporating technical analysis tools can enhance this strategy further.

  • Exponential Moving Average (EMA)
  • Relative Strength Index (RSI)
  • Bollinger Bands
  • Fibonacci retracements

These instruments can refine your understanding of critical support levels and other factors crucial for making well-informed trade decisions regarding exhaustion gaps.

What is an example of Exhaustion Gaps in Trading?

An example of an exhaustion gap in trading in one with a strong trend, gap up, and high volume. Here is a an example for S&P 500:

What is an exhaustion gap
What is an exhaustion gap

Exhaustion gaps can be illuminated with practical examples from the trading world. Consider a bullish exhaustion gap, which typically appears at the tail end of a pronounced bearish trend. This indicates that sellers are running out of steam and that there could be an impending shift towards an upward trend.

Conversely, when considering a bearish exhaustion gap, it manifests after an intense upward trend is in place, characterized by price breaks upwards with significant volume — this suggests buyers are faltering and sellers might be taking over.

To confirm these occurrences as actual exhaustion gaps one must observe certain signs: if prices sink below the lower boundary established by a bearish gap or rise above the peak formed during a bullish gap, such movement may serve as confirmation for traders looking to determine precise entry or exit points. A reversal in pricing coupled with increased trade volumes Trails behind these signals – valuable clues signaling whether to conclude existing positions or engage inversely aligned trades.

By examining concrete examples like these within market activity, traders gain invaluable insights into identifying and capitalizing on exhaustion gaps—a key component potentially enhancing profitable outcomes within their trading strategies.

When is the best time to trade an Exhaustion Gap?

The best time to trade an exhaustion gap is when the market is oversold or overbought, and the next day, it gaps up on high volume.

The optimal moment for trading an exhaustion gap comes after a solid trend has been established. This type of gap often indicates the termination of that trend and hints at a forthcoming reversal. Before entering into any trade, make sure you have confirmation that the gap has closed, as this closing demonstrates potential weakness in the prevailing price action.

When analyzing retracement following a filled gap, it’s critical to ensure that the price does not undercut or exceed the latest swing low or high formed by said gap. If such breaching occurs, it could imply that there may still be life in the ongoing trend. Employing volume analysis along with momentum-based indicators like RSI can augment verification processes once one notes both an occurrence of a gap and its subsequent fill.

An efficacious method for capitalizing on exhaustion gaps involves initiating trades upon witnessing retracement post-gap closure while ensuring stop-loss orders are strategically placed below or above (depending on position) the newly established swing high or low—thus safeguarding against undue losses from unexpected continuations of trends rather than reversals anticipated by typical exhaustion gaps’ behavior.

Summary

Exhaustion gaps, which occur at the end of a bullish or bearish trend, can serve as valuable signals for potential trend reversals. Recognizing these gaps and understanding how to trade them effectively can provide traders with valuable opportunities to capitalize on market changes. We showed you how by providing an informational example and trading strategy.

Throughout this blog post, we’ve delved deep into the world of exhaustion gaps, exploring their formation, causes, and implications for trading. We’ve looked at how to identify exhaustion gaps on a price chart, how to distinguish them from other gap types, and how they can be used in technical analysis. We’ve also discussed various strategies for trading exhaustion gaps and how to manage risk effectively.

Whether you’re a seasoned professional or a budding enthusiast, understanding exhaustion gaps can enhance your trading toolkit and trading arsenal. These gaps provide clear insights into potential market reversals and offer opportunities for profitable trades. So, the next time you spot a significant price gap accompanied by high trading volume, remember the key characteristics of exhaustion gaps and consider the potential trading opportunities they present.

Frequently Asked Questions

What is the exhaustion gap on a candlestick pattern?

An exhaustion gap occurs at the end of a strong trend and is typically the last surge before the trend expires, often on heavy volume. It differs from continuation gaps as it is not followed by new highs or new lows, and is usually closed shortly afterwards.

An exhaustion gap is a technical signal marked by a break lower in prices that occurs after a rapid rise in a stock’s price over several weeks prior.

What happens after an exhaustion gap?

Following an exhaustion gap, there is typically a trend reversal where interest in the stock wanes, resulting in a significant drop in its price and indicating diminishing momentum.

What is the difference between exhaustion gap and continuation gap?

Exhaustion gaps appear as a strong trend is concluding and do not lead to Highs or lows, contrasting with continuation gaps that are succeeded by new peaks in an uptrend or fresh troughs during a downtrend.

How do exhaustion gaps form?

Exhaustion gaps emerge when market overreactions and imbalances result in a notable price gap, often occurring from a last surge in price that lacks support from underlying fundamentals.

How can I trade exhaustion gaps effectively?

For successful trading of exhaustion gaps, it’s crucial to ascertain the prevailing trend, validate the presence of an exhaustion gap, and proceed to initiate a trade according to the specific nature of the identified exhaustion gap.

Wishing you prosperity in your trading endeavors!

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