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Windows - Japanese Candlestick Term for "Gaps"

a gap is when the candlestick's high is separated by no price transactions between it and the following day's low price

A window is the Japanese term for a gap. A window in an uptrend occurs when there is a distance between the high price of day one and the low price of day two. Therefore, there are price levels at which no trades between buyers and sellers occur. A window during an uptrend suggests that prices will move higher; however, very often prices will pull back to the price levels of the window. The window often acts as an area of support in an uptrend. Nison (1991, p. 120) suggests that pullbacks to price levels of the window can be used as buying zones. He also states that if prices close below the window and then continue downward, then that is a sign that traders should sell.

Window in a Downtrend

a gap where no price data is between the first day's low and the next day's high

Similarly, a window in a downtrend occurs when there is distance between the low price of day one and the high price of day two. A window during a downtrend suggests that prices will move lower; but before moving lower, often prices will correct and rise to the price levels of the window. Therefore, the window acts as resistance.

Window in an Uptrend Candlestick Chart Example

candlestick chart with three gap ups

The chart above shows four windows (shown with double blue lines) of the Gold ETF (GLD). Each window shows how the Gold ETF retraced to prices within the price area of the window and that the window successfully acted as support each time. The first window was a 15 day consolidation that tested the upper line of the window support. The second window had a large bullish candlestick that propelled itself off the upper line of the window’s support. The third window had a candlestick’s lower shadow testing the upper support established by the window. The fourth window lower support line was bounced off of by a bullish belt hold candlestick. In all four examples, the price level of the window was tested and was confirmed as an area of support, giving the bulls confidence to move prices even higher.

Window in a Downtrend Candlestick Chart Example

candlestick chart with three gap downs

The bearish chart of Bank of America (BAC) illustrates three windows in a downtrend. In each of the examples, the window successfully held as resistance when prices tried to rebound higher. The first window was rejected by a tweezer top pattern that “filled the gap” but then promptly fell from the upper line of the window’s resistance. The second window’s area of resistance was confirmed by a bearish engulfing pattern that tested the upper line of the window’s resistance. The third window’s resistance was reinforced by a dark cloud cover pattern.

Works Referenced

  1. Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
  2. Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
  3. The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html