Open any daily chart and you’ll eventually find a blank vertical space where the candles skip a range of prices entirely. A stock closes Tuesday at 41.80 and opens Wednesday at 45.20, and nothing traded between those two levels. That empty band is a price gap, and price gaps are among the most misread events on a chart. The first mistake most traders make is reacting to one before they’ve worked out what kind of gap they’re looking at. The same visible hole in the chart can mark the start of a multi-month trend or the exact spot where a run runs out of buyers. Reading it correctly is a matter of context, not shape.
I treat a gap as a question the chart is asking, not an answer it’s handing over. Where does it sit relative to the recent range? What did volume do on the session that produced it? Get those two readings right and the gap sorts itself into one of four familiar types, each carrying a different message about supply and demand.
What price gaps actually are
A gap is a discontinuity between one session’s close and the next session’s open. It forms because information does not wait for the market to be open. Earnings land after the bell, a guidance cut hits overnight, a competitor’s news reprices a whole sector while everyone is asleep. When the exchange reopens, the opening auction has to clear every order that piled up against that new information at once, and it does so at whatever single price balances buyers and sellers. If that clearing price sits well above or below the prior close, the market simply prints there. No trades happen at the levels in between because nobody was willing to transact there.
One mechanical detail is worth holding onto. The gap is a record of prices that were skipped rather than merely prices that moved fast. A stock that grinds from 41.80 up to 45.20 over a full session has traded at 42, 43 and 44 along the way, and buyers exist at each of those levels. A stock that gaps from 41.80 to 45.20 has left no order book behind it in that band. That absence is exactly why gaps matter. It tells you the move happened through repricing rather than through a fight, and repricing carries a different weight than a slow drift.
Intraday gaps exist too, when a news catalyst hits during the session and price jumps a range in a single tick. The logic is identical. Some band of prices found no willing trade.
Common gaps: the range-bound noise
The most frequent gap is also the least informative. A common gap appears inside an established trading range, with no real catalyst behind it, and it usually reflects nothing more than a routine order imbalance at the open. A thinly traded stock that closes at 28.40 and opens at 28.75 on no news has produced a common gap, and more often than not it drifts back through that band within a day or two.
When I mark a common gap on my chart, I note the range it sits inside and I mostly leave it alone. A stock that closes at 41.80, opens at 42.30, and is back at 41.95 by lunch has told me the opening imbalance was routine. No shift in supply and demand sat behind it, so there was nothing to trade.
The misread here is treating a filled common gap as a signal. A filled common gap tells you almost nothing on its own. It does not mark a reversal and it does not launch a new trend; the temporary imbalance simply cleared, which is what common gaps do almost by definition. If you find yourself building a thesis on a gap that sits in the middle of a quiet range, you are reading meaning into noise.
Breakaway gaps: the start of something
A breakaway gap is the one worth respecting. It occurs as a stock leaves a base or a consolidation on a genuine fundamental catalyst and heavy volume, and it often marks the first session of a brand new trend. The opening print sits above the entire prior range, the catalyst is real, and buyers show up in size to defend the move rather than fade it.
The gaps I pay attention to are the ones where the opening price sits above every candle of the prior six weeks, on volume running two or three times the recent average. That combination is the tell: a base that has coiled for weeks, then a catalyst, then a gap that clears the whole structure on volume that confirms the move. This is the setup William O’Neil built much of his growth-stock work around, the powerful gap up out of a sound base backed by institutional buying you can read straight off the volume bar.
A breakaway gap should not fill quickly, and that expectation is the whole point. If the gap fills within a few sessions, the breakout thesis is already in trouble, because a real regime change in demand does not usually hand you the old prices back. A trader using this pattern might treat a fast fill as evidence the move was weaker than it looked, and step back rather than chase.
Runaway gaps: the trend refueling
Once a trend is established, it can produce a second kind of gap in the middle of the move. A runaway gap, sometimes called a measuring gap, forms when a stock already trending higher gaps again on continued strong volume, without necessarily any fresh headline behind it. It shows the move still has enough momentum to leave prices behind it even when no new catalyst is driving it.
The name measuring gap comes from an old rule of thumb. The gap often appears near the midpoint of the whole move, so you can roughly estimate the remaining distance by projecting the run so far past the gap. I treat that as a loose guide and never a target. It is useful for framing how much room a trend-following position might still have, not for setting a precise exit.
What separates a runaway gap from the others is where it sits. It appears mid-trend, after price has already advanced but with no sign of exhaustion, and volume stays strong without spiking to a blow-off extreme. That location is the context that gives it meaning.
Exhaustion gaps: the last gasp
Late in an extended trend, a gap in the same direction as the move can mean the opposite of what it appears to. An exhaustion gap forms after a long advance, often on a final volume spike, as the last wave of buyers rushes in at the worst possible prices. Within a few sessions it is frequently followed by a reversal, which is why it deserves suspicion rather than trust.
This is the trap that catches trend traders who have stopped reading context. An exhaustion gap looks like a continuation. It points the same way the trend has been going, it comes on big volume, and it feels like strength. Treating it as a continuation signal is the expensive error, because the volume spike that produced it was buyers capitulating into the move rather than fresh demand building on it. When I see a gap arrive after a stock has already run a long way, with no base beneath it and a volume bar towering over everything around it, I assume exhaustion until price proves otherwise.
Telling a breakaway gap from an exhaustion gap
Breakaway and exhaustion gaps can look nearly identical in isolation. Both gap in the direction of eventual or existing strength, both come on heavy volume, and both can be large. The difference is entirely in what came before them.
A breakaway gap emerges from a well-formed base, after a stretch of consolidation, at the start of a move. No large prior advance sits behind it, because the advance has not happened yet. An exhaustion gap emerges after a big run, with no base underneath, often on a blow-off volume spike far above any prior session in the trend. So the question I ask is simple. Is this gap leaving a structure, or is it the top of a staircase that has already climbed a long way? The volume shape helps too: a breakaway gap tends to open a sustained stretch of strong volume, while an exhaustion gap often prints one enormous bar and then fades.
Get this distinction wrong and you buy the exact spot a smarter trader is selling. That is why the base matters more than the gap.
Reading the fill and the volume
Two details turn a gap from a shape into information: whether it fills, and the volume on the session that made it.
A gap fills when price later trades back through the skipped range. Tracking whether a gap fills, and how quickly, is a direct read on the conviction behind the move. A gap that fills within hours was mostly noise. A gap that holds for weeks was backed by real repositioning. The edges of an unfilled gap often start acting as support and resistance in their own right, with the lower edge of an up-gap frequently becoming the floor a pullback respects.
Volume is the single most useful confirming detail, and I keep a note of the multiple on every gap I care about. A gap up on 1.2 times average volume rarely holds the way a gap on three times average does. Reading volume on the gap session sorts the informative gaps from the empty ones almost on its own. Light-volume gaps are more likely to fill regardless of which of the four types they appear to be. Heavy-volume gaps carry more informational weight and deserve more patience before you conclude anything from a fill.
Sizing a gap-up entry
The practical problem with a gap up is that it skews your reward before you even enter. If a stock gaps out of a base and you chase the open, your entry already sits well above the structure, so a sensible stop has to sit further away, below the gap or below the prior base rather than just under the pivot.
That wider stop is the whole trade-off. A standard breakout lets you place a stop just beneath the pivot and size the position accordingly. A gap-up entry forces the stop lower, which means the same dollar risk buys you a smaller position. A trader using this pattern might size a gap trade down deliberately, accepting fewer shares in exchange for a stop that sits below the structure instead of inside the empty band. This is ordinary position sizing arithmetic, but gaps make people forget it, because the excitement of the move pulls attention away from where the stop actually has to go.
Chasing a gap with a tight stop placed inside the gap itself is the common way this goes wrong. Price only has to fill part of the gap, which it often does routinely, to take you out before the real move resolves.
Read the gap before you react to it
A gap is only ever as meaningful as the context around it. The identical blank band on the chart can be routine noise inside a range, the birth of a trend out of a base, a mid-move refuel, or the last gasp of a run that is about to turn. Location in the trend and volume on the session are the two readings that decide which one you are looking at, and neither takes more than a glance once you know to check them. Classify first, react second. The traders who lose money on gaps are almost always the ones who skipped the first step.
Learn the pattern. Ride the trend. Keep the gains.
Educational content only. Not investment advice. Trading involves risk. You are responsible for your decisions.