What it means
A price gap is the empty space on a chart between one trading period's closing range and the next period's opening range. It forms when buyers and sellers agree a price that is noticeably different from where the previous session ended, often after overnight orders build up.
Technical analysts (people who study price charts to judge likely moves) classify gaps by the circumstances in which they form. A common gap, sometimes called an area gap, is the least dramatic type.
It occurs when a stock is trading in a steady range and nothing unusual, such as an earnings surprise or a takeover bid, has been announced. The small jump is typically explained by routine factors like order imbalances or a thinly traded session.
Because there is no powerful reason behind it, a common gap often closes quickly. Closing, or filling, the gap means the price later returns to the level where the gap began.
Many traders watch for this return, since a gap that fills in a few sessions suggests the original move had no real conviction. This differs from other gap types that carry more meaning.
A breakaway gap appears when the price leaves a range on high volume and news, a runaway gap occurs in the middle of a strong trend, and an exhaustion gap near the end of a trend can signal a reversal. Telling these apart usually depends on trading volume and the context around the move.
For non-specialists, the useful point is that not every price jump deserves attention. A finance manager reviewing the value of a share-based investment or a holding in a quoted company can reasonably ignore a small common gap, while a gap that follows an earnings announcement deserves proper investigation.
A final caution is that classification is judgement, not science. A gap that looks common on Monday can be relabelled as a breakaway gap by Friday if volume surges and the price never returns.
In practice
Real-world examples.
Example
A utility company's shares have traded between $40 and $44 for three months. One morning they open at $44.60 with no announcement and no unusual volume. Two days later the price is back at $43.80, and analysts note it as a common gap.
Example
A retail investor holding a quoted consumer goods company sees the share open 1.5% higher on a quiet Monday. She checks the news and finds nothing company-specific. She decides not to trade and waits to see whether the gap fills.
Example
A treasury analyst values a small holding in a listed bank at the end of each month. A common gap on the last trading day moves the reported value by a few thousand dollars, and the analyst adds a note to the report. The team keeps the figure as it is, because the valuation follows the closing price.
Formula
Calculation
Gap size = Today's opening price - Previous day's closing price
Gap % = Gap size / Previous closing price
A stock closes at $50.00 on Tuesday and opens at $51.20 on Wednesday. The gap size is 51.20 - 50.00 = $1.20, and the gap percentage is 1.20 / 50.00 = 2.4%. If the stock drifts back to $50.00 on Friday, the gap has been filled, and a trader who bought at the Wednesday open for $51.20 would be sitting on a loss of $1.20 per share.Case study
Seen in the real world.
Maple Ridge Capital is a fictional investment club, used here as an illustrative example. A member notices that a hardware retailer's shares have opened 3% above the previous close and urges the club to buy before the price runs away. The club's treasurer checks the chart and sees the shares have been bouncing in a narrow range for months, with no news and ordinary volume.
The treasurer classifies it as a common gap and recommends waiting. Within four sessions the price falls back to the pre-gap level and the club avoids paying a premium of about $2 per share. The story shows how a simple classification can stop an emotional decision.
Watch out
Common mistakes.
- Reading every gap as the start of a big trend. A common gap carries little information and often reverses.
- Ignoring volume and news when classifying a gap. Without that context, a breakaway gap can be wrongly dismissed as a common one.
- Assuming a gap will always fill. Most common gaps do, but there is no guarantee and waiting for a fill can cost an investor an opportunity.
Questions
People also ask.
What is the difference between a common gap and a breakaway gap?
A common gap occurs inside a trading range with ordinary volume and no news. A breakaway gap marks an exit from a range, usually with heavy volume and a clear catalyst.
How long does it take to fill a common gap?
It varies, but they are typically filled within a few days to a couple of weeks. The time has no fixed rule.
Do gaps happen in all markets?
They are most visible in markets that close overnight, such as shares. Markets that trade around the clock, such as currencies, show fewer clear gaps except over weekends.
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