Old traders' wisdom advises that gaps get filled. This simple expression describes the mechanics of retracement found throughout most market trends. However, some gaps never fill. This knowledge dictates a different approach to these specialized patterns. Swing traders must learn the characteristics of each gap to apply the strategy that aligns properly with their behavior. Start by identifying the location of the event on the trend-range axis.

Edwards/Magee popularized gaps 50 years ago in Technical Analysis of Stock Trends. These old masters described three types of trend gaps found in most stock charts. Breakaway gaps appear as a market breaks out into a new trend move, up or down. Continuation gaps print about halfway through trends when enthusiasm or fear overpowers reason. Exhaustion gaps burn out trends with one last surge of emotion.

Breakaway and Continuation gaps should print high volume that sharply exceeds the 60-bar VMA. Both events provide excellent trades when the trend first pulls back to test the move. They hold sup-res on the first test the vast majority of the time and identify low risk-high reward entry. Markets often retest breakouts very quickly after they occur. If successful, price then moves sharply away from the pullback. But many bars can pass before price returns to a Continuation gap. Crowd intensity tends to carry the trend well past the gap before it yields to any test.

Exhaustion gaps print as trends and oscillators reach extremes. This last burst can occur on very high volume but a lack of participation does not negate the pattern. Exhaustion gaps fill easily and warn traders that the trend is over. Price mechanics fill the gap and often retest the hole from the other side before it proceeds in the closing direction. Congestion patterns can form through wide gap ranges rather than an immediate reversal move. The Exhaustion gap can turn out to represent a hidden Continuation gap in the next larger time frame. This odd phenomenon requires a sharp eye and often does not display until the larger trend ends.

Gap creation aligns with Elliott's 5-wave trend theory. The Breakaway gap corresponds with the initiation of a dynamic 1st or 3rd wave impulse. At the center of 3rd wave, runaway emotions emit the Continuation gap. Then the trend sequence ends through the 5th wave Exhaustion gap. The Continuation gap routinely marks a halfway point for the entire trend. Traders use this knowledge to target major reversals. Visualize the gap as soon as possible after a 3rd wave completes. Draw an extension from the edge of the 1st wave to the new gap. Then double the distance and wait for a last thrust to push price into it. Enter positions when the target strikes as long as other conditions don't negate the trade.

The first test of a Continuation gap frequently occurs after the closure of an Exhaustion gap. After markets complete 5 wave trends, they retrace according to Fibonacci proportion. Pullbacks often fill the primary 5th wave completely through a First Rise/First Failure pattern. Without strong support, the countertrend thrust continues until supply-demand balances enough to reawaken the primary trend. The Continuation gap marks the natural 50% trend retracement and provides the support needed to force a reversal.

Watch for false gap fills. Modern market action closes many Continuation gaps for a bar or two before price thrusts sharply back in the direction of support. This likely reflects growing common knowledge of this fascinating sup-res point. Don't allow this whipsaw phenomenon to negate these profitable trade setups. Entry at the far side of the gap offers very low risk as long as volume remains flat. Or wait for price to remount resistance and execute as the gap recloses.

Continuation gap trades provide high probability entry but remain aware that the subsequent swing will likely fail before it again tests the Exhaustion gap. Deep pullbacks face an extended period of price discovery as trend volatility dissipates. Longer-term positions can survive this process but swing trades may not. Use Trend Mirrors to target an acceptable reward before choosing to execute a gap trade. Exit quickly on the first reversal thrust unless patience allows an extended position.