Gaps and what they tell you
Lesson 3 · about 8 min
A gap is empty space between two consecutive candles: the second candle's entire range sits above the first candle's high, or below its low. Nothing traded in between. Gaps are the clearest evidence a chart can give that something happened while the market was not able to react continuously, and they leave levels behind that traders reference for days or weeks.
The definition, precisely
- Gap up: today's low > yesterday's high. Gap size = today's low − yesterday's high.
- Gap down: today's high < yesterday's low. Gap size = yesterday's low − today's high.
This is a full gap. Traders also talk about a partial gap, where the open is outside yesterday's body but the day's range later overlaps yesterday's range. Partial gaps are much more common and much less informative. When this course says gap, it means the full version unless stated.
| Day | Open | High | Low | Close |
|---|---|---|---|---|
| Monday | 88.00 | 89.20 | 87.40 | 89.00 |
| Tuesday | 93.50 | 95.10 | 93.10 | 94.60 |
Tuesday's low (93.10) is above Monday's high (89.20). Gap size = 93.10 − 89.20 = 3.90, or 3.90 ÷ 89.20 = 4.4% of Monday's high.
|
+---+
| |
| | Tuesday
+---+
|
- - - - - - - - - - - - - - - <- gap zone: 89.20 to 93.10
|
+---+
| | Monday
+---+
|
Why gaps happen
Stocks gap because they stop trading for sixteen hours a day and all weekend. Earnings, guidance, analyst notes, macro data and index rebalances all arrive while the book is closed, so the first print of the next session reflects hours of accumulated opinion at once.
Futures and forex gap mostly over the weekend, when they too are closed. Crypto trades continuously and almost never shows a true gap on the spot chart; when you see one, check for a data outage or an exchange halt before reading anything into it.
A gap on a 5-minute chart during regular hours is rare and usually means a halt or a news release; it is the same phenomenon at a smaller scale.
Who is trapped by a gap
The reason gaps matter for the rest of this course is the same reason every candle matters: someone is on the wrong side. After Tuesday's gap up:
- Anyone short from Monday is losing 4-6% overnight with no chance to have exited in between. Their stops, if they had any, were filled at the open far from where they were placed. Those who did not have stops now hold a painful loss and will sell into any return toward 89-93 to reduce it.
- Anyone who wanted to buy at 89 and missed now has to decide whether to chase at 93.50 or wait for a return to the gap.
That is why the gap zone (89.20 to 93.10) acts as a reference: it is where the missing trading "should" have happened, and a lot of people have a reason to act if price returns there.
Key idea: A gap is a level with a story attached. The empty space is where trapped shorts want to exit and patient buyers want to enter, and it stays relevant until price has traded through it.
Filled and unfilled gaps
A gap fills when price later trades back through the entire gap zone. The cliché "all gaps fill" is not true and not useful; plenty of gaps on strong news never fill. What is true is that a gap either holds as a level (price returns, reacts, and leaves) or fills (price trades through it), and both outcomes are informative.
- Gap holds on the first return: the news was real and the new price is accepted.
- Gap fills quickly on low volume: the initial reaction was over-done; the market is drifting back to prior value.
- Gap fills and keeps going: the gap has failed entirely, trapping everyone who bought the gap.
Recording which of these happened, chart by chart, is part of the hand backtesting in Module 6.
Three gap types by location
Analysts name gaps by where they occur, and the names are worth knowing because they describe different situations, not because the labels predict anything.
| Name | Where it appears | Usual story |
|---|---|---|
| Breakaway | Out of a range or a base, on news | Start of a move; less likely to fill soon |
| Continuation | In the middle of an established trend | Trend accelerating; measured-move guesses begin |
| Exhaustion | After a long run, into a level, often on huge volume | Last buyers piling in; more likely to fill and reverse |
You cannot know which type a gap is on the day it happens. You can only know after price either holds it or fills it, which is the same as saying the label is applied in hindsight. Use the table to think, not to trade.
Gaps on the candle itself
Because a daily candle's open can be far from the prior close, a daily stock candle contains a hidden fifth data point: the overnight change. Two identical-looking bullish candles can be very different if one opened at yesterday's close and the other opened 3% higher. Always read the open against the previous close, not just against today's range.
Try it: On a daily stock chart, scroll back six months and find every full gap (low above prior high or high below prior low). For each, note the size in percent and whether it filled within 5 days, within 20 days, or not at all. Most beginners are surprised by how few there are and by how split the outcomes are.
Recap
- A full gap up means today's low is above yesterday's high; gap down is the reverse. Measure it in points and in percent.
- Stocks gap because they close overnight; crypto almost never does; forex and futures gap over weekends.
- The gap zone is a level because trapped traders and patient buyers both have reasons to act there.
- "All gaps fill" is false; whether a gap holds or fills is the information.
- Breakaway, continuation and exhaustion labels are descriptive and applied in hindsight.