What is a gap?
A gap happens when a session's lowest price is above the previous session's highest price, or the reverse on the way down. The price jumped without passing through the prices in between. It usually happens when news or a disclosure comes out after the close, so the next session's first price is set at a new level. How that first price is set is the subject of the opening and closing auctions.
Four well-known types
Gaps are classified by where they sit on the chart, not by how they look. A gap of the same size can be one type in one place and another type elsewhere.
The practical problem is that this classification is much easier looking back. At the moment of the gap, it is hard to know whether it is runaway or exhaustion, because the difference between them is what happened next. So a gap is more useful as a description of an event than as a way to know what comes.
Does every gap get filled?
You often hear that "every gap gets filled", meaning the price comes back through the empty space. That happens with many gaps, especially common ones, but it is not a rule. Some gaps stay open for months or longer, and some fill only after the price has travelled a long way in the other direction.
Look for a gap
Open the chart of a stock that had an important disclosure and look at the next session. Is there an empty space between the two candles? Did the price later come back to fill it?
Check yourself
1. Yesterday's high was 20.00 and today's low 21.00. How big is the gap in percent?
2. What decides a gap's type?
Summary
- A gap is a space on the chart where no trade took place.
- Its type depends on its location, and often shows only after the move ends.
- Many gaps fill, but "they always fill" is not a rule.