Technical analysisModule 2, lesson 10 of 32
Price gaps
Why gaps appear between trading sessions, common, breakaway and exhaustion gaps, the risk gaps create for stop-loss orders, and the myth that every gap is filled.
In this lesson
- Explain why gaps appear between sessions.
- Describe common, breakaway and exhaustion gaps and why they are only clear in hindsight.
- Explain how gaps cause stop-loss orders to fill far from their trigger prices.
- Explain why the belief that every gap gets filled is misleading.
Builds on
- Breakouts, pullbacks and retestsBreakaway gaps are a form of breakout, explained there.
On this page
In simple terms
Most of the time, each session's prices overlap the previous session's range. Sometimes they do not: a share closes at ₹500, and the next morning opens at ₹530 and never trades below ₹525. On a chart this leaves an empty space, a gap, between the two candles.
Gaps happen because news arrives when the market is closed: results announced after the close, a takeover offer, a regulatory decision, a sharp move in global markets overnight. The pre-open auction then finds a new opening price that reflects the news, as the OHLC lesson explains.
Kinds of gap
Analysts often label gaps by where they appear:
- Common gaps: small gaps inside a trading range, often on little news, that are frequently filled within days.
- Breakaway gaps: gaps that jump out of a trading range or through support or resistance, often on significant news, starting a new move.
- Runaway (continuation) gaps: gaps in the middle of a strong trend.
- Exhaustion gaps: gaps near the end of a long move, after which the trend reverses.
The labels describe what happened afterwards. On the day a gap appears, it is usually impossible to know whether it is a breakaway gap or an exhaustion gap; you find out only later. So the labels are better used to describe history than to predict.
Gap risk for stop-loss orders
Gaps are a major risk for anyone relying on stop-loss orders. A stop-loss is triggered when the price reaches the trigger, but it can only be filled at prices where trades actually happen.
Worked example: A made-up gap down
Malabar Exports closes at ₹600. An investor has a stop-loss sell order with a trigger at ₹570 and a limit of ₹565. Overnight, the company reports a fraud investigation, and the share opens at ₹480.
| Planned loss from ₹600 to ₹570 | 5% |
|---|---|
| Actual opening price | ₹480 |
| Loss if a market-type stop fills near the open | about 20% |
| Limit-type stop at ₹565 | not filled; the investor still holds the share at ₹480 |
Neither kind of stop protected the investor from the gap. The stop-loss orders lesson explains the two types in detail.
Gap risk is larger for shares with frequent news, around results dates, and in volatile or thinly traded shares. It is one reason why position size, not just stop placement, matters, as the stop-loss placement lesson explains.
The gap-fill myth
A popular saying holds that "every gap gets filled": that the price will eventually return to the level before the gap. It is misleading:
- Many gaps are filled, especially small common gaps, because prices move around a lot and will often revisit nearby levels.
- Some are never filled. A share that gaps down on a fraud discovery may never return to its old price. A share that gaps up on a takeover offer may be bought out at the new price.
- "Eventually" can be meaningless. A gap filled after five years is not a useful trading prediction.
Look at a large, unbiased sample rather than memorable examples before believing any rule about gaps.
Why it matters
Gaps show that new information has arrived and been priced in all at once. They expose the limits of stop-loss orders, which cannot protect against prices that are never traded. And the gap-fill myth leads traders to bet against large moves driven by real news. Understanding gaps helps you manage risk around results and announcements.
Limitations
Gap classifications are mostly hindsight. Intraday charts show many tiny gaps between candles that are not meaningful. Shares with price bands can gap only as far as their band allows in one session, then continue the next day.
Common mistakes
- Assuming a stop-loss caps your loss regardless of gaps.
- Betting that every gap will fill.
- Labelling a gap as breakaway or exhaustion on the day it appears.
- Ignoring the news behind the gap.
Try it yourself
- Find a share that gapped down sharply on results in the past year.
- Note the previous close, the opening price and where a stop-loss 5% below the previous close would have filled.
- Check whether the gap has been filled since, and how long it took.
- Repeat for a gap up, and write down what news caused each gap.
Key takeaways
- A gap appears when a session opens above the previous high or below the previous low, so no trades happened in between. Gaps usually follow news released while the market was closed.
- Analysts label gaps as common, breakaway or exhaustion, but which kind a gap was is usually clear only afterwards.
- Gaps mean stop-loss orders can be filled far beyond their trigger price, because there were no trades at the prices in between.
- The idea that every gap gets filled is misleading. Many gaps are filled eventually, some never are, and "eventually" can be years.
- Treat gaps as evidence that new information arrived, and check what it was.
Check your understanding
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Terms used in this lesson
- Price gap
- A jump between one trade and the next with no trades in between, often between one day's close and the next day's open.
- Stop-loss order
- An order that waits until the price reaches a trigger you set, then becomes a live limit order (SL) or market order (SL-M).
- Breakout
- A move above a resistance zone (breakout) or below a support zone (breakdown), best defined by a written rule such as a close a set percentage beyond the zone.
References
- Trading system (order books, order types and stop-loss orders), National Stock Exchange of India. How stop-loss orders are triggered and enter the order book.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.