# Gap Trading: How to Identify, Classify, and Trade Market Gaps
A gap is a price area on a chart where no trading occurred — the stock's opening price is significantly higher or lower than the previous day's closing price, creating a visible gap between the two sessions. Gaps are one of the most powerful signals on a chart because they represent an overnight shift in supply and demand that was strong enough to move the price without any trading taking place.
Gaps happen because of information that arrives when the market is closed: earnings reports released after hours, analyst upgrades or downgrades, macroeconomic data, geopolitical events, or significant news about the company. The gap reflects the market's immediate revaluation of the stock based on that new information.
The Four Types of Gaps
Not all gaps are created equal. Decades of technical analysis research has identified four distinct types, and each has different trading implications.
1. Common Gaps
Common gaps are small price gaps that occur in the normal course of trading, often in low-volume or choppy markets. They have no particular technical significance and are usually filled quickly (price returns to the pre-gap level within a few days). Common gaps often appear in range-bound stocks or during periods of low volatility. They do not represent a meaningful shift in sentiment.
How to identify: small gap size (typically less than 1-2% of the stock's price), no accompanying surge in volume, no obvious news catalyst, and the stock is not in a strong trend.
Trading implication: common gaps tend to fill — meaning price returns to close the gap — making them mild mean-reversion opportunities. But the potential profit is small and the setups are not worth much attention for most traders.
2. Breakaway Gaps
Breakaway gaps are the most significant type. They occur when a stock gaps out of a consolidation pattern, trading range, or support/resistance level on significantly above-average volume. A breakaway gap represents the beginning of a new trend.
How to identify: the gap breaks through a clearly defined technical level (the top of a base, a multi-month resistance, or a descending trendline). Volume on the gap day is 2-5x or more the average. The gap is typically large (3-10%+ depending on the stock).
Trading implication: breakaway gaps are the gaps most worth trading. They signal that a new trend is starting and the stock has left its prior range. Breakaway gaps frequently do NOT fill — the old range becomes support (for an upside gap) or resistance (for a downside gap). Entering in the direction of the gap on the first pullback after the gap is a high-probability strategy.
3. Continuation (Runaway) Gaps
Continuation gaps occur in the middle of an established trend. The stock is already trending and gaps further in the trend direction on strong volume. This confirms that the trend has momentum and that new participants are entering the trade.
How to identify: the stock is already in a clear uptrend or downtrend, and the gap occurs after the trend is established (not at the start). Volume is above average. The gap "runs away" from the prior trend.
Trading implication: continuation gaps are bullish in uptrends and bearish in downtrends. They sometimes mark the approximate midpoint of the move, which is why they are also called "measuring gaps" — you can measure the distance from the trend start to the gap and project that distance above the gap for a target. Continuation gaps may partially fill but usually do not fully close.
4. Exhaustion Gaps
Exhaustion gaps are the dangerous ones. They look like continuation gaps on the surface — a stock in an uptrend gaps up on volume — but they actually mark the final surge of buying before the trend reverses. The "exhaustion" refers to the last burst of enthusiasm from late-arriving buyers who push the price up one final time before the smart money exits.
How to identify (after the fact): the gap is followed by a stall in momentum, a high-volume reversal candle (doji, shooting star, bearish engulfing), and then a decline that closes the gap within a few days. Exhaustion gaps are notoriously difficult to identify in real time, which is why experienced traders are cautious about chasing gaps that occur after a stock has already had an extended run.
How to differentiate from continuation: if the gap is followed by continued momentum and does not fill within 3-5 days, it was likely a continuation gap. If it is followed by a reversal and fills quickly, it was an exhaustion gap. This is determined retrospectively, which is why position sizing and stop losses are critical when trading any gap in an extended trend.
Gap Fill: Does Every Gap Get Filled?
The old trading adage says "all gaps eventually get filled." This is statistically true over long enough time horizons — even multi-year time horizons — but it is not a useful trading principle. Breakaway gaps can remain unfilled for months or years. Telling yourself "this gap will fill eventually" while holding a losing position against a strong trend is a recipe for significant losses.
A more useful framework: - **Common gaps**: usually fill within 1-5 trading days - **Breakaway gaps**: often do NOT fill for weeks, months, or longer — and fading them is fighting the new trend - **Continuation gaps**: may partially fill but usually hold as support/resistance - **Exhaustion gaps**: fill quickly as the reversal begins
Practical Gap Trading Strategy: The Gap-and-Go
The gap-and-go is one of the most popular morning setups among active traders. It works like this:
1. Before the market opens, scan for stocks gapping up 4% or more on above-average premarket volume with a clear catalyst (earnings, news, analyst action). 2. At the open, watch for the first 5-minute candle. If it holds above the premarket low and shows buying pressure (higher lows in the first 15 minutes), the gap has support and is likely to continue. 3. Enter on a breakout above the first candle's high or on a pullback to VWAP in the first 30 minutes. 4. Stop loss below the low of the first 5-minute candle or below VWAP. 5. Target: the next overhead resistance level, or a measured move equal to the first leg.
The inverse (gap-and-fade) works for gaps that fail: if the stock gaps up but immediately sells off below the pre-market low and breaks below VWAP, sellers are overwhelming the gap and a fade back toward the previous close is likely.
Gap Trading Risk Management
Gaps introduce unique risks. The most significant is that a stock can gap against your position overnight, making your stop loss meaningless — if you are holding a long position with a stop at $48 and the stock gaps down to $42 on bad news, your stop triggers at $42, not $48. This is called "gap risk" and is the primary reason many day traders close all positions before the market close.
If you hold positions overnight, manage gap risk by: sizing positions smaller, using options to define your maximum loss (a put option locks in a floor price regardless of gap size), and avoiding holding through known binary events like earnings reports.
Charted can automatically scan your uploaded charts for gap patterns, classify them by type, and calculate gap fill probabilities based on the context — helping you determine whether a gap is worth trading or worth avoiding.
*This content is for educational purposes only and does not constitute financial advice. Trading involves substantial risk of loss. Past performance does not guarantee future results.*