Price Gap

What Is a Price Gap?

A price gap is an area on a price chart where a security's trading range does not overlap with the prior period's range. It usually appears when a stock opens noticeably higher or lower than where it closed the day before, leaving a blank band between the two price bars. Gaps are most often studied on daily charts, and they often follow news released after the market closes.

Gaps are a core idea in technical analysis, the study of price and volume patterns to understand market behavior. Analysts describe a gap by its direction: an up gap opens above the prior high, and a down gap opens below the prior low.

How Gaps Are Interpreted

Traders often classify gaps by context. A common gap may occur during quiet trading and carry little significance. A breakaway gap can appear when price moves out of a consolidation pattern, often with heavy trading volume. A runaway gap appears in the middle of a trend, and an exhaustion gap may appear near its end. Many analysts also watch for a gap fill, where price later trades back across the empty space. These labels are interpretations, and no gap type reliably predicts what happens next.

An Example

Suppose a stock closes at 50 dollars on Monday. On Tuesday, following an earnings announcement, it opens at 54 dollars, and its lowest trade that day is 53 dollars. The price range between 50 and 53 has no trades, so the chart shows an empty band there. This is an up gap. If the stock later falls back into that band, the gap has been filled.

Why It Matters to Investors

Gaps show that the market reacted quickly to new information, and they can reflect a change in market sentiment. However, a gap is not guaranteed to fill, and a large gap can be a sign of volatility rather than a clear direction. Gaps also carry practical risk. A stock may open far from its prior close, so a stop-loss order may execute at a worse price than the investor expected.