Trading Basics: Evolution of a Trader

GAPS SHOWING SUPPORT AND RESISTANCE

In my book, Encyclopedia of Candlestick Charts (Wiley, 2008), I explored rising and falling windows as they pertain to support and resistance. A rising window is a fancy way of saying gap in an upward price trend. A falling window is a gap in a declining price trend. Refer to that book for a discussion of the methods used to test for support and resistance in gaps.

My research found that gaps support price 20 percent of the time. That means price gaps up, and then returns to the gap and stops there one in five times. A gap also shows overhead resistance 25 percent of the time. Price gaps lower then tries to move higher, but halts somewhere within the gap once every four times.

• Gaps show support 20 percent of the time and resistance 25 percent of the time in a bull market.