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Charts · Lesson 08 8 min read Intermediate

Gaps, and what fills them

A gap is a piece of a chart where no trading happened at all. That absence is the whole reason gaps behave the way they do — and it is why some fill within hours while others never fill at all.

What a gap is

A gap is a range of prices at which, during the period in question, nothing traded. Yesterday closed at 101. Today opened at 103.4. Every price between those two exists on the axis and has no transactions behind it.

That emptiness is the whole subject. Everywhere else on a chart, price had to pass through each level and somebody had to be willing to trade there. Across a gap, price teleported.

The empty bandIllustrative
The shaded band contains no trading at all. Six candles later price drifts back down through it and the gap is closed — but notice how quickly it travelled through that band compared with the ground either side of it.

Three kinds, three meanings

Gaps are not one phenomenon. Where a gap sits in the larger structure changes what it means entirely.

  • The common gap. Appears in the middle of a range, on ordinary volume, for no particular reason. These fill quickly and often. They carry almost no information.
  • The breakaway gap. Appears at the edge of a long range, on heavy volume, usually after news. Price leaves the range and does not come back. This is the one that does not fill — and trying to trade the fill is how people find that out.
  • The exhaustion gap. Appears late in an extended move, on very heavy volume, and is followed almost immediately by a reversal. It looks like acceleration and is actually the last of the buyers arriving.
A gap that does not come backIllustrative
Heaviest volume on the chart at the gap, and price never trades back into the empty band. Whoever wanted in, wanted in badly enough not to wait for a better price — and nobody below was prepared to sell into it.

Why gaps get filled

The often-repeated claim that "all gaps fill" is false, and the version that is true is more useful.

Price returns to a gap because the empty band contains no resting orders. Nobody built a position there, so nobody is defending it. When price approaches from the other side, there is nothing to slow it down, and it crosses the band quickly — which is why the fill, when it happens, often happens in a single fast candle rather than a slow grind.

So the honest statement is: gaps offer no resistance, therefore price passes through them easily when it goes that way. It says nothing about whether price will choose to go that way. A breakaway gap on real news may never be revisited for years.

A gap is not a magnet. It is an absence of friction. Those look similar on a chart and are completely different ideas.

Gaps in Indian markets

A few practical notes specific to how trading works here.

  • Indian equities gap constantly, because the cash market is closed overnight while the rest of the world trades. Most overnight moves arrive as a gap at the open rather than as a drift.
  • The pre-open session establishes the opening price through an auction. The gap you see at 9:15 is the outcome of that auction, not the first tick of a normal session.
  • Index futures and options gap too, and the gap in the option premium is usually far larger in percentage terms than the gap in the underlying — because a gap moves both the price and the implied volatility at once.
  • Results and events produce the gaps most likely to be breakaway rather than common. A gap with a reason behind it is a different animal from a gap without one.
Common mistake

Selling a gap up on the assumption it will fill, without asking what caused it. The gaps that fill reliably are the ones with no reason behind them. The ones with a reason are exactly the ones that keep going — and they are also the ones that feel most compelling to fade, because the move looks excessive. Check for a cause before deciding it is excessive.

Read it yourself

Identify the gap and follow what happens to it.

Practice
  1. Between which two candles is the gap, and roughly how wide is it?
  2. How many candles does it take before the gap is completely filled?
  3. Looking at the volume, would you have classed this as a common gap or a breakaway gap on the day it happened?
Show answers

1. Between the third and fourth candles — a gap down from a close of 103.8 to an open of 101.2, about 2.6 wide.

2. Seven candles. Price grinds back up and the gap is fully closed around the eleventh, when trading returns above 103.8.

3. Ambiguous, and that is the honest answer. Volume on the gap candle was 88 against a prior average near 33 — elevated enough to suggest a cause, but the candle closed near its low and the days after showed no follow-through. Elevated volume with no continuation usually resolves as a common gap, which is what happened. Had price kept falling on sustained volume, the same candle would have been a breakaway.

Terms used

Gap
A price band in which no trading occurred between one period and the next.
Fill
Price trading back through the empty band, closing the gap.
Common gap
An unremarkable gap inside a range. Fills easily, means little.
Breakaway gap
A gap out of a range on heavy volume, usually with a cause. Often never fills.
Exhaustion gap
A gap late in a move, on heavy volume, followed by a reversal.

Practise this on your own charts

The Charts track works through 10 lessons like this one, each built around a drawn example and an exercise you complete yourself.

See the Charts track