Options Trading: the Tasuki Gap
In Japanese, a “tasuki” is a sash used to hold up a shirt sleeve, a type of garter. In a tasuki gap, a parallel is found in the three sessions, in which a directional gap is upheld in the third and crucial session. The gap is not filled, so that the direction of movement is strongly supported.
A tasuki gap may be either upside (bullish) or downside (bearish). The three-stick indicator has a distinct series of attributes. Both types are shown in the figure.
An upside tasuki gap consists of an upward day followed by an upside gap; a second upside day; and then a downside day that does not retreat and fill the gap. This is strongly bullish because even with the black session, the gap remains intact. It is held up. This pattern may be found within an existing uptrend, in which case it serves as a continuation pattern. When found within an extended downtrend, it signals reversal.
A downside tasuki gap has the same pattern but in the reverse. It involves a downward day and then a downside gap; a second downside day; and then an upside day that does not retreat to fill the gap. The downtrend is held up. It is strongly bearish because the gap remains intact unlike many common gaps that are immediately filled. When this occurs within a downtrend, it is a continuation pattern. When the downside tasuki gap is found after an extended uptrend, it is a strong reversal signal.
The tasuki gap is interesting because it involves three consecutive sessions. Many candlestick indicators involve single sessions or two consecutive sessions. The tasuki is especially strong as a reversal signal not only because of the three sessions, but because it includes the all-important gal that holds up.
Like an indicators, tasuki gaps should be confirmed independently. It often occurs as an existing trend comes to an end and may also involve a test of resistance or support. When this type of failed breakout occurs immediately before the opposite-moving tasuki gap, reversal is not only strongly indicated, but also confirmed. That is the best type of reversal indicator.
Also seek confirmation when the tasuki gap is accompanied by volume spikes, subsequent gapping action in the indicated direction, or doji (narrow range) days. Also be aware that the tasuki gap does not always lead immediately to the reversal, but might precede a few sessions of sideways movement. Reversal does not always take place immediately. Sideways movement is valuable because it provides a chance for confirming secondary indicators to develop, making the apparent significance of the tasuki gap even more powerful.
As with all indicators, good analysis of candlestick patterns relies on interpretation along with confirming separate indicators. Charting interpretation is going to improve entry and exit timing, but confirmation is always the key.
Michael C. Thomsett is an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com. Thomsett’s latest FT Press book is Trading with Candlesticks.
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