In trading, every detail matters—especially when it comes to price gaps. Gap fill in trading is a concept that attracts traders aiming to profit from temporary price inefficiencies. But what exactly is a gap fill, and how can you build a strategy around it? This guide will break it all down, from the types of gaps to trading strategies and real-life examples.
What is a Gap?
A gap occurs when there’s a noticeable price difference between the closing price of one trading session and the opening price of the next. These gaps show up as blank spaces on a price chart and often indicate a sudden market shift due to factors like:
Overnight news or earnings reports.
Economic data releases.
Major geopolitical events.
Gaps highlight strong market sentiment, but they also create temporary price imbalances that traders can exploit.
Types of Gaps in Trading
Understanding the different types of gaps is crucial for identifying potential opportunities:
1. Breakaway Gap
What it Means: Occurs at the start of a new trend, often breaking out of a trading range or consolidation.
Why it Matters: Signals a strong shift in sentiment, often leading to sustained price movement.
Trading Tip: Consider entering early if the breakout shows strong volume confirmation.
2. Runaway (Continuation) Gap
What it Means: Forms within an existing trend, indicating strong momentum.
Why it Matters: Reinforces the direction of the trend, showing that buyers or sellers remain in control.
Trading Tip: Use this gap as a sign to hold positions or add to an existing trade.
3. Exhaustion Gap
What it Means: Appears near the end of a trend and signals a potential reversal.
Why it Matters: Suggests that the trend may be losing steam, prompting traders to take profits or prepare for a market shift.
Trading Tip: Watch for confirmation of trend exhaustion before entering a reversal trade.
What Does Filling the Gap Mean in Stocks?
"Filling the gap" means that the price retraces to cover the price range created by the gap. Essentially, the price returns to the level where the gap initially started.
Why Gaps Tend to Fill:
The market often seeks equilibrium, correcting temporary price imbalances.
Traders who missed the initial move may place orders that push the price back to its pre-gap level.
Is a Gap Fill Bullish or Bearish?
A gap fill can be either bullish or bearish—it all depends on the direction of the gap and the subsequent price action.
Bullish Gap Fill: Happens when the price gaps down but then rises to fill the gap.
Bearish Gap Fill: Happens when the price gaps up and then drops to fill the gap.
The key is to watch for momentum and reversal signals to determine whether the fill indicates a continuation or a reversal.
What is an Example of a Gap in Trading?
Example:
Day 1 Closing Price: $100
Day 2 Opening Price: $105
The $5 gap between the closing and opening price appears as a blank space on the chart. If the price later retraces back to $100, the gap has been "filled."
What is the Gap Fill Trading Strategy?
The gap fill strategy involves trading in anticipation of the price returning to the pre-gap level.
How to Trade a Gap Fill:
Identify the Type of Gap: Confirm whether it’s a breakaway, continuation, or exhaustion gap.
Look for Reversal Signals: Use indicators like RSI, candlestick patterns, or support/resistance levels to confirm potential reversals.
Entry Points: Enter after a confirmed reversal signal, targeting the gap fill level.
Exit Points: Set profit targets at or near the original price level before the gap occurred.
Risk Management in Gap Fill Trading
Since gaps can signal strong market sentiment, they can be risky if the price continues in the direction of the gap instead of filling it. Here’s how to manage your risk:
Stop-Loss Orders: Place stops just beyond key support or resistance levels to limit losses.
Position Sizing: Don’t risk more than a small percentage of your account on a single trade.
Market Context: Avoid trading gaps during major economic events, as volatility can increase unpredictably.
How Often Do Stock Gaps Get Filled?
Research shows that stock gaps are filled around 70% to 80% of the time, but the timing varies:
Short-Term Gaps: Often fill quickly, sometimes within the same day.
Breakaway Gaps: Less likely to fill soon, as they signal the start of a strong trend.
Understanding the type of gap helps you gauge the likelihood and timeframe for a potential fill.
What Invalidates a Gap Fill?
A gap fill may be invalidated if:
Volume Confirms the Trend: High volume during the gap suggests strong market conviction, making a gap fill less likely.
Continuation Gaps: These reinforce trends rather than signaling retracements.
Price Action Signals: If the price moves sharply away from the gap zone without reversal patterns, the gap may not fill soon.
Final Thoughts
Understanding what is gap fill in trading and knowing how to use it can help you take advantage of price imbalances in the market. By identifying the type of gap and watching for confirmation signals, you can better anticipate when a price is likely to fill—or when it might continue its current trend.
That said, no strategy is foolproof. Pair your gap fill trades with solid risk management, and always stay aware of market news that could disrupt typical price patterns. The more you refine your approach, the more confident you’ll become in spotting and trading gap fills effectively.
