There are three types of Price Gaps: the breakaway, the runaway and the exhaustion gap. Each are used in stock trading.

The Breakaway Gap usually occurs at the end of an important price pattern, which usually is the signal of a significant market move. The breaking of resistance often occurs on a breakaway gap once the market has completed a major basing pattern. This type of gap occurs often when there are major breakouts from topping or basing areas.

Breakaway gaps usually happen on heavy volume and are not usually filled. Even though prices may return to the upper end of the gap and may close a part of the gap, some portion of the gap is always left unfilled. The general rule is the heavier the volume, the less likely the gap is to be filled. It's important prices not fall below gaps in an uptrend. Upside gaps most often act as support areas on subsequent market corrections., and a close below an upward gap is a sure sign of weakness.

The Runaway Gap, which is also called the measuring gap, can be found around the middle of a move. It occurs when prices leap forward and reveals a situation where the market is flowing effortlessly on moderate volume. The runaway gap signals market strength in an uptrend and weakness in a downtrend. Just as with the breakaway gap, runaway gaps act as support under the market on subsequent corrections and are usually not filled. A close below the runaway gap is a negative sign in an uptrend.

This gap is also labeled the measuring gap because it occurs about half way through a trend. The Swing trader, Options trader or Day trader can estimate where the move will end by doubling the amount achieved from the original trend start or breakout.

The Exhaustion Gap, the third type of gap, shows itself near the end of a market move after all objectives have been achieved and the other two types of gaps have been identified. In the case of an uptrend, prices near the end make one final leap upward which quickly fades, and prices turn lower within a few days or within a week. Prices closing below that last gap are a good indicator the exhaustion gap has hit. This is also a prime example where falling below a gap in an uptrend has very bearish implications.

Andy Swan is co-founder and head trader for DaytradeTeam.com.  To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.