Which type of gap is characterized by a common gap formation?

The type of gap that is characterized by a common gap formation is indeed referred to as a common gap. Common gaps typically occur in a trading range or before a continuation pattern and do not signal strong buying or selling interest. These gaps appear on a price chart when the market opens at a different price than the previous day’s close, but the gap is eventually filled as the price action resumes its previous trend.

Common gaps are often seen during periods of low volatility and are more likely to be filled quickly as traders do not view them as significant. This contrasts with other types of gaps like exhaustion gaps, breakaway gaps, and runaway gaps, which indicate strong momentum or shifting market sentiment and usually remain unfilled for a longer period. Thus, understanding common gaps helps traders identify areas on the chart where price ineffectiveness may occur without strong trends emerging. This is why identifying common gaps in trading can aid in decision-making and strategy development.