What you will learn
- Explain what a gap is and what usually causes one
- Tell apart common, breakaway, runaway, and exhaustion gaps
- Understand what it means for a gap to be filled
- Recognize that classifying a gap is much clearer in hindsight
Sometimes a price does not move smoothly from one period to the next but jumps, opening sharply higher or lower than where it previously closed and leaving an empty space on the chart. These jumps are called gaps, and they show moments when something happened while the market was not actively trading. Understanding the kinds of gaps and what they tend to mean is a useful piece of chart reading, and it connects to the trading-hours lesson from Unit 1.
Understanding gaps: common, breakaway, runaway, and exhaustion
Walks through all four gap types clearly. Watch how where a gap appears in a trend changes what it likely means.
What causes a gap
A gap occurs when the opening price of a period is meaningfully different from the closing price of the previous period, so that no trading took place in the price range between them. Gaps are typically caused by news and events that arrive outside of trading hours, such as an earnings report released after the close or a major announcement overnight. The accumulated reaction to that news hits all at once when trading resumes, producing the jump.
Key terms
- Gap
- A jump where the open is far from the previous close, leaving an empty space with no trading between.
- Breakaway gap
- A gap as price breaks out of a range at the start of a new trend. Significant.
- Exhaustion gap
- A gap near the end of a trend, a final burst that often signals a reversal.
- Filling the gap
- When price later retraces to cover the empty space, returning to the pre-gap level.
The main types of gaps
- A common gap is a minor, often insignificant gap that appears within a trading range and frequently fills quickly, meaning price soon returns to the pre-gap level.
- A breakaway gap occurs as price breaks out of a pattern or range at the start of a new trend, and it is significant because it signals strong conviction behind a new move.
- A runaway or continuation gap appears in the middle of an established trend, reflecting a surge of momentum that confirms the trend is still powerful.
- An exhaustion gap appears near the end of a trend, a final burst that quickly fails, often signaling the trend is running out of steam and may reverse.
| Gap | Where it appears | What it suggests |
|---|---|---|
| Common | Inside a range | Minor, often fills quickly |
| Breakaway | Start of a new trend | Strong conviction, significant |
| Runaway | Middle of a trend | The trend is still powerful |
| Exhaustion | Near the end of a trend | The trend may be running out of steam |
Match the gap to its meaning
Pair each gap type with what it typically signals.
Filling the gap
Traders speak of a gap being filled when price later retraces to cover the empty space, returning to the level it gapped from. Common gaps fill often and quickly. Breakaway and runaway gaps, by contrast, are less likely to fill soon, because they reflect genuine shifts in supply and demand rather than fleeting noise. Whether and how fast a gap fills is one clue to which type of gap it was.
A gap is the market reacting all at once to something that happened while it was closed. The type of gap tells you whether the reaction will stick.
Gap trading strategies (Barchart)
A reputable overview of gaps and approaches to trading them. Watch for how volume helps tell a significant gap from a minor one.
Using volume and a dose of realism
Volume, from the earlier lesson, helps distinguish the types. Significant gaps such as breakaway gaps typically occur on heavy volume, reflecting strong participation, while minor common gaps occur on lighter volume. Be honest, though, that classifying a gap is usually far clearer in hindsight than in the moment. At the time it happens, it is rarely obvious whether a gap is a breakaway, a continuation, or an exhaustion gap, and that label often only becomes clear after later price action reveals which it was. As with every tool here, gaps are suggestive evidence to be weighed alongside the trend, volume, and levels, and trading them requires the same risk management that governs everything in this unit.
Which gap is it?
A stock has been in a long, tired uptrend for months. It suddenly gaps up hard on huge volume, then the next few days it stalls and starts falling. In hindsight, which type of gap was this most likely, and what is the honest caution?
A final high-volume burst that then fails near the end of a long trend looks like an exhaustion gap. But the honest point is that this classification was obvious only after later price action, not at the moment it happened.Hindsight and honesty
Explain in a sentence or two why the fact that gaps are easiest to classify in hindsight is an important caution for anyone trying to trade them in real time.
Write an answer before comparing it with the model response.
Model answer
At the moment a gap forms, you usually cannot tell whether it is a breakaway, a runaway, or an exhaustion gap, because the label depends on how price behaves afterward. So acting confidently on a gap in real time means guessing which type it is before you can know. That uncertainty is exactly why gaps should be weighed alongside trend, volume, and levels, and traded only with strict risk management.
Gaps are single dramatic events on one chart. The next lesson widens the view, examining the same asset across several timeframes at once to avoid being fooled by any single chart.