TRADING GLOSSARY

Gap: when price jumps over empty space

A gap occurs when price opens significantly higher or lower than the previous close, leaving a visible empty space on the chart. Gaps happen when significant news or events change market sentiment while the market is closed (overnight, weekends, or holidays).

Types of gaps

Common gap: Occurs in low-volume, rangebound markets. Usually fills quickly (price returns to close the gap). Not very significant. Breakaway gap: Occurs at the start of a new trend, often breaking out of a consolidation pattern on high volume. Significant and often does not fill. Runaway (continuation) gap: Occurs in the middle of a strong trend, indicating acceleration. Usually does not fill near-term. Exhaustion gap: Occurs near the end of a trend on high volume. Often fills quickly and signals a reversal.

Trading gaps

Gap and go: Trade in the direction of the gap when it occurs on high volume with a clear catalyst. Gap fill strategy: Fade the gap (trade against it) expecting it to fill — works primarily for common gaps in rangebound conditions. Avoid unexpected gaps: Set stop losses and be aware that gaps can jump over your stop level, causing more loss than planned.

Understanding gap types helps you determine whether to trade with or against the gap, or avoid the situation entirely.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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