Showing posts with the label exhaustion-gap


THE ISLAND REVERSAL   The performance of island reversals is perhaps surprising only for its mediocrity. Failure rates for both tops and bottoms are reasonable, holding below the 20% threshold that I view as the maximum allowable for reliable formations. The average decline from an island top ranges between 17% and 23%, depending on market conditions. The range is similar to many other bearish chart patterns. However, the average rise from an island bottom is a disappointing 21% to 23%, and that is well below the 35% to 40% I like to see for bullish chart patterns. With these mediocre performers, trading every island that you see is a way to drown in losses. You can improve performance by selecting patterns with the proper height and width characteristics for the market you are trading, as described later in this chapter. Pullbacks and throwbacks are prevalent, suggesting that the gap after the island completes closes quickly. Investors can make use of this behavior to


GAP THEORY   WWW.FURTHERGROW.IN    A gap is an area on a price chart in which there were no trades. Normally this occurs after the close of the market on one day and the next day’s open. Lot’s of things can cause this, such as an earnings report coming out after the stock market had closed for the day. If the earnings were significantly higher than expected, this could result in the price opening higher than the previous day’s close. If the trading that day continues to trade above that point, a gap will exist in the price chart.  Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement.  Gaps appear more frequently on daily charts, where every day is an opportunity to create an opening gap. Gaps can be subdivided into four basic categories: WWW.FURTHERGROW.IN • Common gap • Breakaway gap • Runaway/ Continuation gap • Exhaustion