A gap occurs when the price of an instrument jumps between two trading periods with no trading in between, leaving an empty space on the chart.
Types of Gaps
1. Common Gap
- Occurs in normal trading
- Fills quickly (hours/days)
- Low significance
2. Breakaway Gap
- Signals start of a new trend
- High volume
- Important support/resistance
3. Runaway (Continuation) Gap
- Occurs mid-trend
- Confirms trend strength
- Rarely fills quickly
4. Exhaustion Gap
- Near end of a trend
- Often followed by reversal
- High volume
Gap Trading Strategy
“Gaps tend to fill” — price often returns to the gap level:
- Identify unfilled gaps
- Wait for price to approach gap level
- Trade in the direction of gap fill
- Set stop loss beyond the gap
Key Points
- Forex gaps occur mainly at weekly open (Sunday)
- Stock gaps occur at daily open
- Larger gaps = stronger significance
- Not all gaps fill (breakaway gaps may not)