Ever noticed those empty spaces on a price chart where the market seems to "jump" from one level to another? These are called price gaps, and they reveal important information about market sentiment. Learning to read and trade gaps can give you a significant edge.
What Is a Price Gap?
A gap occurs when a security's opening price is significantly different from its previous closing price, with no trading happening in between. On a candlestick chart, you'll see a visible空间 (empty space) between two candles.
Gap Up: The new candle opens above the previous candle's high Gap Down: The new candle opens below the previous candle's low
Gaps typically form overnight in stock markets, but they can also occur during trading hours in fast-moving markets or after significant news events.
Why Do Gaps Form?
Gaps are caused by sudden shifts in supply and demand that happen while the market is closed (or too quickly for continuous trading):
- Earnings announcements — Positive or negative surprises trigger gaps
- Economic data releases — Jobs reports, GDP, inflation numbers
- Breaking news — Mergers, acquisitions, geopolitical events
- Analyst upgrades/downgrades — Sudden sentiment shifts
- Pre-market/after-hours trading — Price discovery before the regular session
Understanding why a gap formed helps you predict what might happen next.
The Four Types of Gaps
Not all gaps are created equal. Each type has different implications:
1. Common Gaps (Area Gaps)
What they are: Small gaps that occur during sideways, range-bound markets with no significant catalyst.
Characteristics:
- Usually filled quickly (price retraces back through the gap)
- Low trading volume
- Appear within consolidation patterns
- Little predictive value
How to trade: Common gaps often fill within the same day or week. Consider fading the gap (trading in the opposite direction) with tight stops.
2. Breakaway Gaps
What they are: Gaps that occur when price breaks out of a consolidation area, signaling the start of a new trend.
Characteristics:
- Break through support or resistance
- High trading volume
- Often don't fill for extended periods (or ever)
- Appear at the beginning of a new trend
How to trade: Trade in the direction of the gap. A breakaway gap with high volume is a strong signal that a new trend is beginning. These gaps often become new support or resistance levels.
3. Runaway Gaps (Continuation Gaps)
What they are: Gaps that occur in the middle of a strong trend, showing that momentum is accelerating.
Characteristics:
- Appear during established uptrends or downtrends
- Confirm the strength of the current move
- Usually accompanied by increasing volume
- Often called "measuring gaps" (approximately halfway through the trend)
How to trade: These gaps confirm the trend. If you're already positioned, it's validation to hold. If not, they can offer continuation entries with stops below/above the gap.
4. Exhaustion Gaps
What they are: Gaps that occur near the end of a trend, signaling that the move is running out of steam.
Characteristics:
- Appear after an extended price move
- High volume but followed by reversal
- Fill quickly (often within days)
- Signal trend reversal ahead
How to trade: Be cautious—these gaps are often traps. If you see a gap after a long trend followed immediately by reversal candles, consider taking opposite positions or tightening stops.
How to Identify Gap Types
Distinguishing gap types in real-time can be challenging. Here's a framework:
| Factor | Common | Breakaway | Runaway | Exhaustion |
|---|---|---|---|---|
| Location | In range | At S/R levels | Mid-trend | End of trend |
| Volume | Low | High | Moderate-High | Very High |
| Prior trend | Sideways | Consolidation | Strong trend | Extended trend |
| Fill speed | Fast | Slow/Never | Slow | Fast |
| Catalyst | None | Major breakout | Trend confirmation | Final rush |
Gap Trading Strategies
Strategy 1: Gap Fill (Fade the Gap)
Concept: Most gaps eventually fill—price retraces back to close the empty space.
How to trade:
- Wait for a gap up or gap down
- Look for reversal signals (bearish candles after gap up, bullish after gap down)
- Enter in the opposite direction of the gap
- Target: The "fill" level (previous close)
- Stop: Above the gap high (gap up) or below gap low (gap down)
Best for: Common gaps, exhaustion gaps
Caution: Don't fade breakaway gaps—they're least likely to fill.
Strategy 2: Gap and Go
Concept: Trade in the direction of the gap when momentum suggests continuation.
How to trade:
- Identify a gap accompanied by high volume
- Wait for the first 15-30 minutes to confirm direction
- If price holds above the gap (gap up) or below (gap down), enter with the trend
- Set stops just beyond the gap level
- Trail stops as momentum continues
Best for: Breakaway gaps, runaway gaps
Strategy 3: Gap Support/Resistance
Concept: Gaps often become future support or resistance zones.
How to trade:
- Mark the gap area on your chart
- When price returns to the gap zone later, watch for reversals
- The gap area acts as a support zone (gap up) or resistance (gap down)
- Enter on confirmation of bounce/rejection
Best for: Unfilled breakaway gaps that price revisits weeks or months later.
Volume: The Gap Trader's Friend
Volume is crucial for interpreting gaps:
| Gap + Volume Pattern | Interpretation |
|---|---|
| Gap up + high volume | Strong bullish sentiment, likely breakaway |
| Gap up + low volume | Weak conviction, likely to fill |
| Gap down + high volume | Strong bearish sentiment, likely breakaway |
| Gap down + low volume | Weak conviction, likely to fill |
| Gap + declining volume after | Momentum fading, watch for reversal |
Always check volume to assess the gap's significance.
Common Gap Trading Mistakes
1. Trading Every Gap
Not all gaps are worth trading. Focus on high-volume gaps with clear catalysts, and be selective about common gaps in ranging markets.
2. Ignoring the Context
A gap up in a downtrend has different implications than one in an uptrend. Always consider the broader market context before trading.
3. Chasing Gaps at the Open
The first few minutes after a gap can be chaotic. Wait for the initial volatility to settle before making decisions.
4. Assuming All Gaps Fill
While many gaps fill eventually, breakaway gaps can stay open for months or years. Don't fight a strong trend just because a gap exists.
5. Forgetting Risk Management
Gaps can create volatile conditions. Always use stop-losses and appropriate position sizing.
Gaps in Different Markets
Stocks
Most gap trading focuses on stocks because markets close overnight, creating regular gap opportunities at the open.
Forex
24-hour forex markets have fewer gaps (mainly weekend gaps), but they can be significant when they occur.
Crypto
24/7 crypto markets rarely gap on price charts, but gaps can appear on exchanges with different trading hours or during extreme volatility.
Pre-Market Preparation for Gap Trading
For stock traders, here's a morning routine:
- Scan for gaps — Look for stocks gapping 2%+ on pre-market scans
- Check the catalyst — Earnings, news, rating changes?
- Assess volume — High pre-market volume indicates strong interest
- Identify key levels — Where is previous support/resistance?
- Wait for the open — Let the first candles form before acting
Key Takeaways
- Gaps occur when opening price differs significantly from previous close
- Four types: Common (fills quickly), Breakaway (new trends), Runaway (trend continuation), Exhaustion (trend ending)
- Volume helps distinguish gap types—high volume gaps are more significant
- Gap fill strategy: Fade weak gaps, expecting reversion
- Gap and Go strategy: Trade strong gaps in the direction of momentum
- Always consider the broader trend context
- Not all gaps fill—don't fight strong breakaway gaps
Understanding gaps gives you insight into market psychology. When thousands of traders see something overnight that changes their valuation, the gap shows you that shift in real-time.
Practice identifying and trading price gaps risk-free with ChartMini's trading simulator. Learn to spot gap opportunities before risking real capital.