Bullish Gap & Bearish Gap Candlestick Pattern

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Table of Contents

Bullish Gap

Definition

A bullish gap is defined as a Japanese candlestick with an opening price higher than the closing price of the previous candlestick.

It generally occurs in a bullish trend.

Characteristic

A bullish gap often forms after a significant increase characterized by several large green Japanese candlesticks.

Significance

A bullish gap is a continuation pattern, indicating the continuation of the bullish movement.

Note

A bullish gap can occur in a bearish trend, often following unexpected news from investors.

In this scenario, the bullish gap is less relevant than in a bullish trend.

However, it may indicate a breakthrough gap suggesting a potential trend reversal.

Invalidation

If the lowest point of the candlestick after the gap is surmounted by the next candlestick, the structure can be considered invalidated.

Bearish Gap

Definition

A bearish gap is defined as a Japanese candlestick with an opening price lower than the closing price of the previous candlestick.

It generally occurs in a bearish trend.

Characteristic

A bearish gap often forms after a significant decline characterized by several large red Japanese candlesticks.

Significance

A bearish gap is a continuation pattern, indicating the continuation of the bearish movement.

Note

A bearish gap can occur in a bullish trend, often following unexpected news from investors.

In this scenario, the bearish gap is less relevant than in a bearish trend.

However, it may indicate a breakthrough gap suggesting a potential trend reversal.

Invalidation

If the highest point of the candlestick following the gap is surmounted by the next candlestick, the structure can be considered invalidated.

Concluding Thoughts

Both bullish and bearish gaps are important indicators within technical analysis, signaling the continuation of existing trends.

While they are typically more relevant within their respective trends, unexpected occurrences can lead to breakthrough gaps, potentially indicating trend reversals.

Understanding these patterns and knowing when they are invalidated can provide valuable insights for traders, helping them make informed decisions based on market behavior.

However, as with all technical indicators, it’s essential to use these gaps in conjunction with other tools and analysis to ensure a comprehensive trading strategy.