A gap is an empty area on a chart where the price opens above the previous high or below the previous low, leaving space between two candles. An up gap means the new period opened higher than the last period's high, and a down gap means it opened lower than the last low. Gaps are common around earnings announcements, news, weekends, holidays and market openings, and they are one of the easiest chart features to see.
This guide explains the main types of gap that traders name, how gaps are commonly filled, and how a gap at the open can change the outcome of a stop-loss order. The names describe what traders think a gap signals, and the evidence for those interpretations is limited. A gap tells you that the price moved sharply between two periods. It does not tell you why.
What are the main types of gap?
Traders usually describe four types. A common gap appears inside a trading range, often on a quiet day, and tends to have little meaning for the trend. A breakaway gap appears when the price leaves a range or pattern, often with heavy volume, and it may mark the start of a new move.
A runaway or continuation gap appears in the middle of an established trend, and traders sometimes read it as a sign that the move has strength. An exhaustion gap appears near the end of a trend, when the last burst of buying or selling leaves a gap that is not supported afterwards.
These labels are easier to assign after the fact than in real time. The same gap can look like a breakaway at the open and an exhaustion gap a few days later. A gap should be read with its context, including the trend before it, the volume on the day, the news behind it and the level it leaves behind. Treating the name as a rule is a common mistake.
What does it mean when a gap fills?
A gap fills when the price trades back to the level of the previous close, or through the gap area. Many traders expect common gaps to fill, because the move that created them was not supported by the wider market.
Breakaway gaps are often expected to stay open for longer, because they may mark a change in the balance of buyers and sellers. Neither expectation is a law, and a gap can stay open for years or fill within a day.
The table below uses invented prices to show how a gap might be measured and how it could fill. The figures are illustrative.
| Step | Price | What it means |
|---|---|---|
| Previous close | 40.00 | The last price before the gap |
| Next open (news overnight) | 43.00 | The gap opens 3.00 above the previous close |
| Gap size | 3.00 (7.5%) | The distance between the two prices |
| Gap level to watch | 40.00 | The price a fill would need to reach |
| Fill | 40.00 or lower | Traded back to the previous close |
The gap in this example is 3.00 points, or 7.5 percent of the previous close. A trader holding the stock would see a sharp paper gain at the open, and the question is whether the price will hold above 40.00 or return to it. The answer depends on the news, the volume and what the price does at the new level. A gap that holds for several sessions with rising volume is read differently from one that drifts back within a day.
Why does a gap matter for a stop-loss?
A stop-loss order is triggered when the price reaches a set level. In normal trading, the trade is closed at or near that level. When the price opens beyond the stop level because of a gap, the order can fill at the open price, which may be much worse than the stop.
A stop set at 40.00 on a stock that opens at 36.00 after bad news will usually be filled near 36.00, not 40.00. This is sometimes called a gap through the stop.
The risk is largest when a holding is kept through a period with no trading, such as overnight, over a weekend or across a holiday. Check the exchange calendar for closures, and remember that news can arrive when the market is closed. A stop does not limit the loss when the price cannot trade through the stop level. It is a useful tool for normal moves, but it is not a guarantee against a large gap. Position size should allow for the possibility that the exit happens far below the planned level.
How should a trader respond to a gap?
A gap is a reason to stop and read the situation before acting. Start with the cause, since a gap caused by an earnings report or a regulatory announcement is a different event from one that follows a change in index membership.
Then check whether the open has traded at high volume and how far the price has moved from the gap level. A trader who already holds the stock may decide to reduce the position, move the stop or leave it alone, and that decision should follow a rule written in advance rather than the excitement of the open.
A trader who wants to buy after a gap faces a different question. Chasing an up gap leaves a wide stop, because the nearest sensible level may be the gap itself. Waiting for the gap to settle, or for a retest of the level, can give a better entry, but it can also mean missing the move entirely. There is no universal answer, and the choice should be tested like any other rule.
Whichever path you take, record the gap, the decision and the outcome. Over time that record shows whether your handling of gaps helps or hurts, which matters more than the label you gave the gap at the open.
Common mistakes
Assuming every gap will fill. Some gaps stay open for a long time, and waiting for a fill can mean holding through a larger loss.
Treating a gap name as a signal. A gap labelled breakaway or exhaustion still needs confirmation from volume, the trend and the levels.
Forgetting overnight and holiday risk. A stop placed close to the price may not protect a position from a gap that happens while the market is closed.
Checklist
- Mark the previous high or low, and note the size of any gap in price and percentage.
- Check the volume on the day the gap formed, if your data shows it.
- Read the news or event behind the gap before deciding what it means.
- Note the level the gap would fill to, and watch how the price reacts there.
- Check the exchange calendar for closures before holding through a weekend or holiday.
- Size the position so that a stop filled well below its planned level is acceptable.
- Record the gaps you trade and how they resolved, so the names can be judged against results.
Key takeaways
A gap is an empty area on a chart where the price opened beyond the previous candle's range. Traders name gaps as common, breakaway, runaway or exhaustion, and the names are interpretations rather than rules. Gaps often fill, but not reliably, and the level they leave is a reference point to watch. A gap can also cause a stop-loss to fill far from its planned price, so the risk of holding through closures should be planned for in advance.
This guide is for general information, not financial advice. See the disclaimer.