What is a 'Gap'

A gap is a break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release.

Gap

BREAKING DOWN 'Gap'

An example of two different gaps can be seen in the chart above. Notice how the stock closes the trading session before the first gap at $50 and opens the next trading day near $46 with no trading occurring between the two prices.

Gaps are a regular occurrence in all financial markets. However, they are rarely seen in the forex market since it is highly liquid and trades 24 hours a day. The open on the first day of the week is where gaps are most likely to occur in the forex market.

Types of Gaps

Gaps most commonly occur at the open of major exchanges. Opening gaps are a manifestation of an imbalance in supply and demand at the market opening in a particular security created during the overnight as a result of a newsworthy event that has an effect on a securities price. Savvy day traders exploit these gaps in an attempt to capture quick profits from the price corrections that take place as sellers and buyers struggle to find a new equilibrium price. Gaps that form in the intraday market are usually a result of an important economic announcement.

Once a gap occurs, it takes one of several forms. A filled gap is one in which the price completely retraces and fills the gap within a few bars subsequent to when the gap took place. Theses gaps typically happen in either direction during sideways range-bound trading markets or in the direction opposite the trend in trending markets. Continuation gaps are normally found in trending markets, and the gaps are typically in the direction of the trend. Price action usually continues in the direction of the trend with strong volume, and the gap is not filled. Breakaway gaps commonly take place when the price breaks out of a trading range or a price pattern.

Trading Strategies for Gaps

Many shrewd traders use gaps as setups for trade entry decisions. A general rule of thumb for trading gaps in the same direction of the minor trend and accompanied by strong volume is to take a position in the direction of the minor trend. For gaps that occur in the opposite direction of the minor trend, traders take a position contrary to the minor trend with a very tight stop-loss. Taking small quick profits with minimal risk is characteristic of gap trading strategies.

RELATED TERMS
  1. Common Gap

    A price gap found on a price chart for an asset. These gaps are ...
  2. Gapping

    In general, a trading strategy in which the participant borrows ...
  3. Exhaustion Gap

    A gap that occurs after the rapid rise in a stock's price begins ...
  4. Breakaway Gap

    A term used in technical analysis. A breakaway gap represents ...
  5. Runaway Gap

    A type of gap on a price chart that occurs during strong bull ...
  6. Sanku (Three Gaps) Pattern

    The Japanese word for a candlestick pattern that consists of ...
Related Articles
  1. Trading

    Playing The Gap

    Learn how you can earn money by analyzing the disruptions in normal price patterns.
  2. Investing

    Gap Strategies To Try For Intraday Trades

    Many traders lack effective strategies to manage gaps, whether they pop up on open positions or mark the first play of the day. These strategies may help.
  3. Trading

    Analyzing The Market With Trend Mirrors

    Past price action can exert a powerful influence on current rallies and selloffs.
  4. Insights

    Gap Trades Higher Despite Decline in Sales (GPS)

    Gap had disappointing sales this May but their stock price still rose.
  5. Investing

    Find Turning Points With Single-Day Patterns

    On their own, single-day patterns can be unreliable, but that doesn't mean they can't be used effectively.
  6. Investing

    Should Investors Squeeze Into The Gap?

    The Gap is closing stores and conducting layoffs. Will investor panic lead to opportunity?
  7. Insights

    Gap Inc. Down 11% After Disappointing April Sales (GPS)

    Gap Inc. has fallen 11% after news that its April and Q1 sales are much weaker than expected.
  8. Insurance

    Steer Clear of Over-Priced Gap Insurance Providers

    Major insurers will generally give you a better deal on gap insurance than a car dealership. But watch for gaps in gap coverage.
  9. Investing

    How Gap Plans to get Back in Style (GPS)

    Gap is currently out of style. Here's how it plans to change that.
RELATED FAQS
  1. How are Sanku (Three Gaps) patterns interpreted by analysts and traders?

    Find out how analysts and traders interpret a Sanku, or three gaps, pattern located within a bar chart or Japanese candlestick ... Read Answer >>
  2. What are the main differences between Exhaustion Gaps and Breakaway Gaps?

    Read about the primary differences between two types of price chart gaps – breakaway and exhaustion – and how traders react ... Read Answer >>
  3. What are the main differences between a Runaway Gap and a Exhaustion Gap?

    Discover the primary differences between runaway and exhaustion gaps, and see why gap differentiation depends on subsequent ... Read Answer >>
  4. How do I build a profitable strategy when spotting an Exhaustion Gap?

    Learn potentially very profitable trading strategies traders use to take advantage of a market reversal after identifying ... Read Answer >>
  5. How are Runaway Gap patterns interpreted by analysts and traders?

    Find out what runaway gaps mean in a price chart and how traders and technical analysts interpret them differently than other ... Read Answer >>
  6. How are Exhaustion Gap patterns interpreted by analysts and traders?

    Learn how to spot and interpret exhaustion gap patterns like traders and analysts do, and see why these patterns are considered ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center