What is an Exhaustion Gap?
Quick Answer: An exhaustion gap appears near the end of a trend when price gaps beyond prior extremes but quickly fails, signaling trend fatigue and potential reversal.
Understanding Exhaustion Gaps
An exhaustion gap occurs near the end of a trend when price gaps beyond prior extremes but fails to follow through, signaling waning momentum and potential reversal.
Spotting Exhaustion
Look for gaps after prolonged runs, especially if accompanied by spikes in volume and momentum divergence. Reversal candles or springs around the gap provide confirmation.
Trade Plan
Aggressive traders fade the gap with stops beyond the extreme; conservative traders wait for a break back into the prior range and target mean reversion levels.
Risk Control
Gaps can appear during illiquid periods or news events. Always monitor the economic calendar and size positions defensively, because follow-through can still occur if you misread the context.
News-Driven Gaps
Not every gap is exhaustion; sometimes it reflects new information. Validate with fundamentals before fading aggressive moves.
Related Terms
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