Technical Analysis · Intermediate · 5 min
Opening gaps
You can identify an opening gap, name the classic gap types, explain what a gap fill is and why stops do not protect against gaps.
Nothing traded in between
A share closes at 51.30. The next morning it opens at 53.00. On the chart there is an empty space between the two candles, because nobody could trade at any price in between.
Gaps like this are common at the open of exchange-traded markets. They show that something changed while the market was closed, and they create some of the most discussed levels on a chart. They also pose a risk that many traders underestimate.
Open far from the close
A gap, as the lesson on slippage showed, is a jump in price with no trading in between. An opening gap forms when a session opens far from the previous close, usually because news or a build-up of orders arrived while the market was closed. Much company and economic news is released outside regular trading hours, as the SEC's bulletin on extended-hours trading notes.
Edwards and Magee's classic textbook distinguishes several types, and the names are still widely used:
- Common gaps appear inside ranges and often close quickly.
- Breakaway gaps start a new move out of a range.
- Runaway gaps appear in the middle of a strong move.
- Exhaustion gaps appear near the end of a move, shortly before it stalls.
Which type a gap was is usually clear only afterwards.
A gap fill happens when the price later trades back to where the gap started: for a gap up, back down to the previous day's high. Many traders watch for this, and the saying "gaps always fill" is popular. It is not a rule. Some gaps fill within hours, some after months, and some never.
Gaps matter most for risk. A stop order becomes a market order when triggered. If the price gaps over the stop, the order fills at the next available price, which can be far beyond the stop. The SEC warns about exactly this.
Partly filled
In the fictional chart, a share rises slowly from 50 to 51.30 over twelve days.
- On day 13, it opens at 53.00. The previous high was 51.42 and the new low is 52.78, so the gap covers 51.42 to 52.78.
- Over the next five days, the price falls back to 51.70, into the gap, but not to 51.42. The gap is only partly filled.
- From there, the price rises to 53.60.
Now imagine a trader who had been short at 51.30 with a stop at 51.80. The stop would have triggered at the open on day 13 and filled near 53.00, a loss more than three times as large as planned. Holding positions through times when the market is closed, especially before scheduled news, always carries this gap risk.
Common mistakes
- Believing gaps always fill. Many do, but not all, and not on any schedule.
- Trusting stops over a weekend. Stops do not protect against gaps.
- Calling the gap type too early. Breakaway or exhaustion is often only clear later.
- Ignoring news timing. Earnings and economic data are common gap triggers.
The takeaway
An opening gap is a jump between one close and the next open. Some gaps fill, some never do. Gaps can skip right over stops.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the candle that opened with a gap.
Tap the chart.
Candle 13 opened at 53.00, well above the previous day's high of 51.42. No trading happened in between.
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2When is a gap called filled?
Here, the price fell back to 51.70, into the gap, but not to 51.42. The gap was only partly filled.
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3A stop order sits at 51.00. The share closes at 52.00 and opens the next day at 49.00. What happens?
A triggered stop becomes a market order. After a gap, the next available price can be far away, as the SEC warns.
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4Do gaps always fill?
The saying that gaps always fill is not a rule. Gaps after major news can stay open for a very long time.
of 4 correct.
Sources
- U.S. SEC, Investor.gov: Stop, Stop-Limit, and Trailing Stop Orders (Investor Bulletin)
- U.S. SEC, Investor.gov: Extended-Hours Trading (Investor Bulletin)
- Edwards & Magee: Technical Analysis of Stock Trends (1948, book)