What Is a Stock Gap?
A stock gap is a visible discontinuity on a price chart that appears when a security opens at a materially different price than the previous session’s close, leaving an empty “gap” on the chart where no trading occurred. Gaps most often occur between trading sessions (overnight or over the weekend) when news, earnings, upgrades/downgrades, macro announcements, or other events change supply/demand outside regular market hours. Gaps can signal new trends, trend continuations, or potential reversals depending on their type and context. (Source: Investopedia)
Key takeaways
– A gap is an opening price substantially above or below the prior close, creating a blank space on a chart.
– Four commonly used gap types: common, breakaway, runaway (continuation), and exhaustion. Each has different implications for trend and volume.
– Most gaps are caused by news or events that change overnight sentiment; many—but not all—gaps later get “filled” (price returns to the pre-gap area).
– Traders use gap signals for strategies like “gap-and-go” (trade with the gap) or “fade the gap” (trade expecting a fill), but these require disciplined risk controls. (Source: Investopedia)
How to interpret stock gaps
1. Look at volume
– High volume with a gap suggests conviction and a higher probability the gap indicates a meaningful change (trend start/continuation or major reversal).
– Low volume gaps are weaker and more likely to be “common” gaps that fill quickly.
2. Consider gap location relative to support/resistance and trend
– A gap away from congestion/support/resistance areas (breakaway gap) can signal a new, sustained move.
– A gap within a trading range (common gap) often gets filled.
– A gap in the direction of an existing trend (runaway/continuation gap) suggests trend strength.
3. Time frame matters
– Gaps on intraday charts (e.g., 1-minute, 5-minute) are more frequent; daily and weekly gaps are less frequent but usually more significant. Your interpretation should match the trading time frame.
4. Watch follow-through price action
– Does price continue in the gap direction the next session? Does price quickly reverse and fill the gap? The follow-through determines whether the gap mattered or was temporary.
Exploring the different types of stock gaps
1. Common gaps
– Description: Small gaps that occur frequently and typically have little volume or follow-through.
– Behavior: Often get filled quickly; not necessarily indicative of a trend change.
– Best use: Short-term trades or ignored by trend-followers.
2. Breakaway gaps (also called “breakout” gaps)
– Description: Occur when price breaks out of a consolidation area, trading range, or chart pattern with significant volume.
– Behavior: Often mark the start of a new trend and are less likely to be filled quickly because the market has shifted to a new price discovery range.
– Best use: Trend-following entries—look for confirmation with volume and price follow-through.
3. Runaway/continuation gaps (measuring gaps)
– Description: Happen in the middle of a strong trend as momentum traders pile in; often occur after a trend is already established.
– Behavior: Signal continuation of the trend; may be used to measure the potential extent of the move (hence the name measuring gap).
– Best use: Add-to-winning-position opportunities for trend-followers, with careful stops.
4. Exhaustion gaps
– Description: Appear near the end of a trend, often after an extended move and on unusually high volume. They are sometimes followed by a rapid reversal.
– Behavior: The gap may be quickly filled as buyers/sellers run out of steam.
– Best use: Warning sign for traders to tighten stops or consider reversing; sometimes used by contrarian traders.
Real-world stock gap examples
– Amazon (AMZN), Oct. 26–27, 2023: Small upward gap from $119.57 to $127.74. This gap followed a reversal from a downward move, and the stock continued to climb—an example where a gap accompanied trend reversal/strength. (Source: Yahoo Finance chart)
– Alphabet (GOOGL), Oct. 24–25, 2023: Downward gap from $138.81 to $125.61 after a period of gains. Price returned toward the pre-gap level and filled the gap rather than continuing a prolonged decline—an example of a gap that filled rather than signaling a lasting reversal. (Source: Yahoo Finance chart)
Why do stock gaps fill?
– Liquidity rebalancing: Overnight or after-hours price moves can be exaggerated by thin liquidity; normal trading restores liquidity and may move price back to the pre-gap area.
– Profit-taking and mean reversion: Short-term participants who pushed price to a new level may realize gains, causing counter-moves. Market makers and institutional traders also work to fill order imbalances.
– Lack of lasting news effect: If the news that created the gap is not sustained by follow-up information or actual fundamental change, sentiment can revert.
Gaps tend to fill often, but not always—breakaway or strong continuation gaps backed by material news and high volume are less likely to be filled quickly. (Source: Investopedia)
What is price gap risk?
Price gap risk is the risk that a security’s price moves significantly between close and the next open without intraday trading to allow execution at intermediate prices. That sudden move can leave traders exposed to larger-than-expected losses or missed opportunities. Examples of gap causes: earnings misses, guidance changes, geopolitical events, macroeconomic surprise releases.
How traders manage price gap risk (practical steps)
– Close or reduce positions before market close if you cannot tolerate overnight exposure.
– Use stop-loss orders, but be aware that stop orders may be executed at worse prices when a gap occurs (slippage). Consider stop-limit orders if you require price control (but stop-limits can fail to execute).
– Use options: buy protective puts or collars to cap downside between sessions, or use options spreads to limit risk.
– Size positions conservatively when holding overnight. Limit exposure to a percentage of portfolio you’re comfortable losing on a gap move.
– Monitor after-hours and pre-market trading and news feeds for events that might drive gaps.
– Consider trading only during regular session hours to avoid gap risk altogether.
How often do stocks gap?
– Frequency depends on the time frame and the stock. Intraday charts show more gaps; daily charts show fewer; weekly charts show even fewer.
– Stocks with high overnight news flow (biotech, small caps, highly-short stocks) gap more often. Large-cap, liquid stocks gap less often but still gap around earnings and major news. (Source: Investopedia)
Practical step-by-step guide for traders who want to trade gaps
Before market open
1. Scan: Screen for pre-market movers and recent news that could cause a gap (earnings, guidance, M&A, macro).
2. Classify the gap: Determine whether it looks like a common, breakaway, continuation, or exhaustion gap based on location, recent trend, and news.
3. Check volume: Pre-market volume helps but remember it’s much thinner than regular session volume.
4. Define a plan: Decide entry, stop, and target levels; define maximum position size and risk per trade.
At market open / first 5–30 minutes
1. Observe first 1–5 minutes: Many gap strategies wait for early price action to confirm direction (gap-and-go) or reject the gap (fade).
2. Trade setups:
– Gap-and-go: If price opens in the gap direction on strong volume, wait for a brief consolidation then enter with a stop near the consolidation low (for upward gaps) or high (for downward gaps).
– Fade the gap: If a gap is unsupported and shows early signs of reversal, enter toward the pre-gap area with a tight stop beyond the most recent high/low.
3. Use scale-in/out: Consider taking partial profits and trailing stops to manage risk and capture further moves.
Intraday management
1. Trail stops as the move strengthens to protect gains.
2. Watch for news flow that might change the thesis.
3. If price fills the gap and stalls, reassess—this may indicate the gap was only a short-term reaction.
End of day and after-hours
1. If holding overnight, re-evaluate position size and protective measures (options, stop adjustments).
2. Track after-hours news—new information can create additional gaps at the next open.
Gap trading strategies (rules-of-thumb)
– Gap-and-go (trend continuation): Prefer gaps accompanied by high volume that break out of consolidation. Rule: enter on confirmation (small pullback or continuation bar), stop under consolidation, target based on prior resistance or measured move.
– Fade the gap (mean-reversion): Prefer gaps with low volume or gaps into strong resistance/support levels. Rule: enter toward the pre-gap area with tight stops and small position size.
– Trade the follow-through: If a breakaway gap breaks pattern and the next day confirms with another gap or strong candle, follow with trend-following methods.
Limitations and risks
– Misidentifying gap type can lead to losses.
– Slippage and gapping beyond stop orders can produce larger-than-expected losses.
– News-driven gaps can produce sudden, unpredictable price moves; models and historical signals are imperfect.
– Transaction costs and taxes eat into frequent trading strategies.
The bottom line
Gaps are clear, actionable events on charts that reflect sudden shifts in market sentiment. Understanding the four basic gap types (common, breakaway, runaway/continuation, and exhaustion) plus the role of volume, location, and follow-through helps traders determine whether a gap signals a new trend, trend continuation, or a likely fill. Successful gap trading requires clear rules, disciplined risk management, and a plan for overnight gap risk—especially around earnings and major news.
Sources and further reading
– Investopedia. “Gap.” https://www.investopedia.com/terms/g/gap.asp
– Yahoo! Finance. AMZN and GOOGL historical charts (for example price gaps cited): https://finance.yahoo.com/quote/AMZN/chart and https://finance.yahoo.com/quote/GOOGL/chart
Disclaimer
This article is educational and not investment advice. Gap trading carries significant risk; test strategies in paper trading and consult a licensed financial professional before trading real capital.