Understanding Gap Up and Gap Down Openings
Stocks often open away from the previous close — a gap. Here’s what gaps mean and the common types.
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A gap occurs when a stock opens at a price noticeably different from its previous close — a "gap up" (higher) or "gap down" (lower) — with no trading in between. Gaps usually reflect news or sentiment that built up while the market was closed.
Why gaps happen
Overnight developments — results, global cues, news, large orders — change demand before the market reopens. The pre-open session discovers the new opening price, which can be well away from yesterday’s close.
Common types of gaps
- Breakaway gap — price gaps out of a range or pattern, often starting a new trend (strong signal, especially on high volume).
- Continuation (runaway) gap — occurs mid-trend, confirming momentum.
- Exhaustion gap — a final gap near the end of a big move, often preceding a reversal.
- Common gap — minor, often "filled" quickly, with little significance.
"Filling the gap"
Price often returns later to the pre-gap level ("filling" the gap), especially for common gaps. Some traders fade small gaps expecting them to fill; others trade breakaway gaps in the gap’s direction. Neither is guaranteed.
What it means for you
- For traders — gaps need care: stop-losses can be jumped (a gap can open past your stop), and the first minutes are volatile.
- For investors — a gap on your holding usually just reflects new information; don’t react to the open itself without understanding why.
Gaps carry information but also risk, since they bypass intervening prices. Education only, not advice.
