Gaps and their types

You go to sleep holding a stock that closed at ₹100. Over the weekend the company announces a large new order. When the market opens on Monday, the very first trade prints at ₹115.

Price skipped every number in between. Nobody bought at ₹105. Nobody sold at ₹110. There is a clean blank space on the chart - a stretch of prices at which no trading happened at all. This is a gap: a jump between one candle's close and the next candle's open, with a whole price range that had no trades inside it.

So here is the plain question. How do you read a level where zero trading took place? Is the empty space a magnet that will pull price back down to fill it, or a launchpad for a fresh move higher? This module gives you the honest answer - which starts with admitting that, on the morning it happens, you often cannot tell.

Most of the time, price moves in small steps because trading is continuous - every rupee up or down happens because a buyer and a seller met at that price. A gap is what you see when that meeting never happened at those prices.

In the Indian market, this is almost always an overnight or pre-open event. The exchange closes, and while it is shut the news arrives - results, a big order, a regulatory action, a global sell-off. By the time the opening auction runs the next morning, the crowd's view of what the stock is worth has already shifted so far that the first trade prints well away from yesterday's close. The steps in between never get walked because no one, in that pre-open auction, wanted to trade there.

That is why a gap is worth studying at all: it is a moment where the market violently agrees the previous price was wrong. A quiet drift says opinion is changing slowly. A gap says opinion changed all at once, hard enough to leap a range. The size of the leap is a rough measure of how surprised the crowd was.

The catch - and it is the spine of this whole module - is that a gap tells you the crowd was surprised, not what happens next. A gap can be the start of a powerful new move or the last, over-excited gasp of an old one, and the jump itself looks the same in both cases. Gaps also belong to the family of sudden, outsized moves that ordinary "it usually goes up a bit or down a bit" thinking underrates. A stop sitting inside a gap does not protect you - price opens straight past it and fills far worse than your level, which is the first practical reason to respect gaps rather than romanticise them.

Chartists sort gaps into four working types by where on the chart the jump happens. The names are old, and they are useful as a vocabulary - as long as you remember they are mostly labels applied after the fact.

Common gap. A small jump inside a quiet, sideways range. A common gap carries almost no signal - it is the ordinary noise of a stock going nowhere, and it usually fills within a few days because nothing structural changed to justify the new price.

Breakaway gap. A jump that leaps price out of a long range, or straight through a major support or resistance level. A breakaway gap often comes on heavy volume and can kick off a genuine new trend, leaving behind traders who were positioned for the old range. This is the gap least likely to fill quickly, because it marks a real change in what the stock is worth.

Runaway (measuring) gap. A jump in the middle of an already-strong trend. A runaway gap is a sign of forceful continuation: buyers who missed the move panic and pay any price to get in (or, in a downtrend, sellers rush the exit). It is called a "measuring" gap because it often lands near the midpoint of the whole move - though that is a rough tendency, not a ruler.

Exhaustion gap. A jump near the end of a big, euphoric move. An exhaustion gap is the last rush of latecomers piling in at the top. The demand runs dry shortly after, and the gap fills as the move collapses. On the day, it can look exactly like a runaway gap - the difference only shows up in what price does next.

Two more ideas complete the vocabulary. A gap fill is simply price later trading back across the empty range, closing the blank space. And an "island reversal" is a small cluster of candles left stranded by a gap on both sides - a jump up, a few days trading, then a jump back down - which you will meet again later in the book.

Watch a gap the way you would in real time, without the benefit of knowing the ending. illustrative

Below is a composite stock climbing steadily. On the day marked, results land overnight and it gaps up - the open (₹265) sits well above the previous close (₹250), leaving a clean empty band between them. The price then holds the new level and keeps rising.

Here is the important discipline. On the morning of that gap, you do not yet know which of the four types it is. It could be a breakaway (a new trend beginning), a runaway (the trend accelerating), or an exhaustion gap (the top). All three would print the exact same candle at the open. What separates them is only visible afterwards: this one held and extended, so in hindsight we would call it a breakaway or runaway. Had price instead bled back below ₹250 over the next three days, the very same opening candle would earn the name "exhaustion".

So the live read is not "name the gap and act." It is: note the gap, mark the level it left behind (here, ₹250), and watch whether the crowd defends the new prices or abandons them. The empty band at ₹250 becomes your line in the sand. Hold above it and the gap is being respected; slide back through it and the move is failing. The chart hands you a level to watch, not a label to trust.

A gap cannot tell you its own type on the day it forms. This is the single most important limit, and every other honest caution flows from it. Breakaway and exhaustion gaps are visually identical at the open - same jump, same volume spike, same excitement. You only learn which it was by watching price hold or fail over the following days. Any confidence about the label on the morning itself is borrowed from hindsight you do not have yet.

A gap cannot promise a fill. "Gaps always fill" is folklore, not a rule. Many common gaps do fill quickly because they meant little to begin with. But a true breakaway gap on real news can go years without filling, or never fill at all. Betting on a fill is betting against whatever new information caused the jump.

A gap cannot tell you it is safe to place a tight stop just under it. Because gaps happen while the market is shut, the next surprise can leap straight past your stop and fill you far below where you meant to exit. The gap is a reminder that price can teleport, not just walk - which is precisely why position size, not a stop level, is your real protection against the overnight surprise.

And a gap tells you nothing about whether the business is any good. It is a picture of a sudden change in price, driven by news the crowd is still digesting. Whether the new order, the new result, or the new fear actually changes what the company is worth is a separate question the chart cannot answer.

The same few mistakes catch beginner after beginner around gaps.

1. Trusting "all gaps fill." Influencers love this line because it sounds like a law. It quietly encourages holding losing positions and fighting a fresh, powerful trend. Some gaps fill in a day; some structural gaps never fill. "Eventually" cannot be traded.

2. Naming the gap on day one. Calling a fresh jump a "breakaway" and sizing up as if the trend is confirmed is confidence you have not earned. The breakaway is only a breakaway once it has sustained - and by then you already have real evidence, not a guess.

3. Chasing the open. Buying the first print of a gap up, before you know whether the new level holds, means you often buy the exhaustion top. The patient move is to let price show whether it defends the gap.

4. Forgetting the overnight risk. Treating a stop as a guaranteed exit ignores that the next gap can open right through it. Gaps are the clearest everyday proof that stops are instructions, not guarantees.