A gap is an area on a price chart where no trading occurred, appearing as empty space between two candlesticks. Gaps form when a stock opens significantly above (gap up) or below (gap down) its previous close due to overnight news, earnings, or pre-market activity. Gaps signal strong sentiment shifts and create unique trading opportunities.
- Price opens above/below previous close with no trades between
- Different types: breakaway, continuation, exhaustion, common
- Many gaps fill eventually, but not all
How Gaps Form
Gaps occur when supply-demand shifts overnight:
Gap Up Example:
Day 1 Close: ₹100
Overnight: Positive earnings announced
Day 2 Open: ₹115 (gap up)
Chart Shows:
Day 1: Candle top at ₹100
Day 2: Candle bottom at ₹115
Gap: ₹100-115 range with no trades
Gap = Strong bullish sentiment
Quick Reference: Gap Types
| Gap Type | Location | Implication |
|---|---|---|
| Breakaway | Start of new trend | Strong, rarely fills quickly |
| Continuation | Middle of trend | Trend strength, may not fill |
| Exhaustion | End of trend | Reversal coming, fills quickly |
| Common | In trading range | Insignificant, usually fills |
Example: Gap Trading Scenarios
Gap and Go Strategy:
| Time | Price | Action |
|---|---|---|
| Prev Close | ₹200 | - |
| Open | ₹215 | Gap up +7.5% |
| 9:20 | ₹218 | Holding above gap |
| 9:30 | ₹220 | BUY (gap holds) |
| Target | ₹235 | Momentum continuation |
Gap Fill Strategy:
| Time | Price | Action |
|---|---|---|
| Prev Close | ₹200 | - |
| Open | ₹215 | Gap up |
| 9:20 | ₹212 | Fading |
| 9:30 | ₹208 | SHORT (fade gap) |
| Target | ₹200 | Fill the gap |
Gaps are empty spaces on charts where price jumped overnight. Breakaway gaps start trends and may not fill. Exhaustion gaps end trends and fill quickly. Most gaps fill eventually, but timing varies. Trade based on gap type and context.
Gap Trading Strategies
Gap and Go
If gap holds in first 15-30 minutes, trade in gap direction. Momentum often continues.
Gap Fill (Fade)
If gap appears overextended, trade against it expecting price to fill the gap.
Gap Hold Entry
If gap fills partially but holds, enter in gap direction when it bounces.
Breakaway Gap
Strong gap with volume breaking key level. Trade in gap direction; don’t fade.
Gap Analysis
Gap Size
- Small gaps (under 2%): Less significant
- Medium gaps (2-5%): Worth analyzing
- Large gaps (5%+): Major event
Volume
- High volume gap: More significant
- Low volume gap: More likely to fill
Location
- At support/resistance: Breakaway potential
- In middle of range: Likely common gap
Common Mistakes
-
Fading breakaway gaps – These gaps signal new trends; fading them is dangerous.
-
Assuming all gaps fill – Some gaps never fill for years.
-
Chasing extended gaps – Gap up 15% and entering at 20% = poor entry.
-
Ignoring gap type – Different gaps require different strategies.
How JournalPlus Tracks Gaps
JournalPlus logs gap conditions at entry, tracking whether your gap trading strategies (gap and go, gap fill, etc.) are profitable.
