What Are Gaps?
💡 Definition
A gap occurs when price opens significantly above or below the previous period’s close, leaving a blank space on the chart. It reflects a sudden shift in sentiment or liquidity caused by news, earnings, or institutional order flow. Gap trading strategies aim to exploit these imbalances for potential profit.
Gaps are windows into emotion — panic, euphoria, or repricing. Understanding their types and context allows traders to predict whether they’ll be filled or sustained.
Visual Representation
Common Gap Examples
Gaps highlight zones where no trades occurred — rapid price jumps between sessions or candles.
Types of Gaps
🟢 Common Gap
Definition: Small gap within a range or consolidation.
Behavior: Usually fills quickly as the market normalizes.
Use: Fade the move; trade toward gap closure.
🚀 Breakaway Gap
Definition: Gap that forms at the start of a new trend or breakout zone.
Behavior: Signals strong momentum; rarely fills soon.
Use: Trade with the breakout direction, not against it.
⚡ Runaway (Continuation) Gap
Definition: Appears mid-trend as momentum accelerates.
Behavior: Reflects strong participation; may act as dynamic support/resistance.
Use: Join trend; treat gap zone as potential retest area.
🛑 Exhaustion Gap
Definition: Final surge at trend’s end, fueled by emotional buying/selling.
Behavior: Often reverses soon after; filled quickly.
Use: Fade the exhaustion; look for reversal confirmation.
Why Gaps Form
- News & Earnings: Overnight announcements lead to instant repricing.
- Order Imbalance: Lack of counter-orders at prior close price.
- Institutional Activity: Big funds reposition between sessions.
- Emotional Reaction: Panic or greed drives illiquid openings.
- Low Liquidity Periods: Thin sessions (e.g., pre-market) exaggerate gaps.
How to Trade Gaps
Step-by-Step Process
1. Identify the Gap Type: Context is key — range gap or breakout gap?
2. Check Volume: High volume = institutional conviction; low = likely fill.
3. Wait for First 15–30 Min (Intraday): Let initial volatility settle before trading.
4. Gap Fill Strategy: If gap begins filling, target previous close with stop beyond gap extreme.
5. Continuation Strategy: If volume expands and price holds beyond the gap, enter with trend.
6. Confirm with Structure: Look for alignment with S/R or trendline confluence.
7. Manage Risk: Gaps move fast — keep tight stops and predefine targets.
Gap Psychology
🧠 Market Psychology Behind Gaps
Gaps expose raw emotion — fear, surprise, or greed. Traders trapped on the wrong side rush to exit, fueling momentum. Smart traders wait for reactions at the gap edge: if price rejects the gap zone, continuation is likely; if it fills and reverses, sentiment has flipped.
Common Mistakes in Gap Trading
⚠️ Avoid These Errors
- Assuming all gaps fill — some never do (especially breakaway/runaway gaps).
- Chasing right at open without confirmation.
- Ignoring volume and context — not all gaps carry conviction.
- Trading against the dominant trend.
- Failing to manage risk in highly volatile gap environments.
Advanced Gap Concepts
📊 Gap Fill Probability
Historical stats show small/common gaps fill ~80% of the time, while breakaway/runaway gaps fill <40%. Use this data to guide expectations.
📈 Gap and Go Strategy
Used by day traders — enter when price breaks above the first 1–5 min high of a gap-up with volume confirmation.
🔄 Gap Fade Setup
Trade in the opposite direction of the gap when early reversal signs appear (e.g., failure to hold beyond gap zone).
🪶 Partial Fill Concepts
Sometimes only part of the gap fills — note 50% retrace level; full fills are not always required for a reversal.
The Bottom Line
Gap trading captures opportunity from sudden shifts in sentiment and liquidity. Mastery lies in distinguishing impulsive noise from genuine institutional repricing. Always assess volume, context, and structure before engaging — and remember, gaps tell stories, but confirmation trades them.