Gap

A gap is a price gap on the chart. It occurs when the opening price of a financial instrument is well above or below the closing price of the previous period, so that no trading took place in the range between the two prices. On a bar chart or candlestick chart, a gap appears as an empty space between two consecutive bars; a line chart, which only connects closing prices, does not show it.

How gaps occur

Gaps occur more often in illiquid markets than in liquid ones, because there are fewer market participants and therefore fewer orders at intermediate prices. Larger price jumps are usually triggered by news – for example company results, economic data or political events that are published while the market is closed.

Example: a share closes at $50. After the close, the company reports results that are much stronger than expected, and the next morning the share opens at $54. The price has skipped the range between $50 and $54 – a gap of $4. If the price later returns to $50, traders say the gap has been "closed" or "filled".

Chart analysts distinguish between several types of gap, including common gaps within a trading range, breakaway gaps at the start of a new trend, runaway gaps in the middle of a strong move and exhaustion gaps near the end of a trend.

Why gaps matter for traders

In the forex market, which trades around the clock during the week, gaps mainly appear when trading resumes after the weekend. CFDs on shares and indices can also gap at the start of a trading session. Gaps are a risk for open positions: if the price jumps over a stop-loss level, the stop order is executed at the next available price, which may be considerably worse than planned. Gap risk is therefore an important part of risk management.