Gaps and their types

A trader goes to sleep holding a stock that closed at ₹100. Over the weekend, the company announces a massive new contract. When the market opens on Monday morning, the very first trade executes at ₹115.

The price completely skipped over every number between ₹100 and ₹115. No one bought at ₹105, and no one sold at ₹110. It is a blank space on the chart. How do you analyze a price level where absolutely zero trading occurred? Do you treat the empty space as a magnet that will inevitably pull the price back down, or as a launchpad for a massive new rally?

A gap is a jump between one candle's close and the next candle's open with no trading activity in between. In equity markets, this is almost always an overnight or pre-open repricing triggered by news, earnings, or macroeconomic shifts. The crowd's perception of value shifts so violently while the market is closed that the opening auction skips an entire price range.

There is a working taxonomy of four major gap types:

1. Common Gaps: These occur inside a sideways, choppy range. They tend to fill quickly because they do not represent a structural shift in supply or demand. They carry very low signal value.
2. Breakaway Gaps: These occur when price violently leaps out of a massive range or breaks a major support/resistance level. They often happen on huge volume, leaving trapped traders behind, and kick off a brand new trend.
3. Runaway (Measuring) Gaps: These occur right in the middle of a powerful, established trend. They are a sign of intense continuation, as sidelined buyers panic and pay any price to get in.
4. Exhaustion Gaps: These occur near the absolute end of a massive, euphoric move. It is the last desperate rush of the crowd piling in at the top. The momentum dies shortly after, and the gap violently fills as the trend collapses.

Every price in this module is an illustrative example, not a real quote. [illustrative]

The honest catch to this entire taxonomy is that these labels are mostly assigned in HINDSIGHT. On the morning a massive gap occurs, a breakaway gap and an exhaustion gap can look absolutely identical. The chart cannot tell you on Monday morning which one it is. You only know it was a breakaway if the trend sustains for a month. You only know it was exhaustion if it collapses a week later.

Because you cannot predict the outcome on day one, you must always define what would change your mind about the gap. If you assume it is a runaway gap and stay heavily exposed, but the price immediately starts bleeding back into the empty space on heavy volume, the evidence has changed. You must accept that it is likely an exhaustion gap and manage your risk accordingly.

Influencers and forum gurus love to parrot the folklore that "gaps always fill." They will look at a stock that gapped up 30% on a revolutionary new product and tell their followers to wait because the chart "must" fill the gap.

This is incredibly dangerous. While many common and exhaustion gaps do fill, a true breakaway gap might not fill for a decade, or literally ever. "Eventually" is not a tradeable statement. Telling a beginner that a gap will always fill is a manipulation that encourages them to hold onto massive losing positions while fighting a brand new, powerful trend.

Gaps are violent expressions of supply and demand imbalances. They represent moments where the market violently agrees that the previous price was completely wrong.

When you encounter a gap, do not rush to label it or assume it must behave a certain way. Watch the structure that forms immediately after the jump to determine if the crowd is willing to support the new valuation.