Stock gaps: what gap up and gap down mean

Written by the Tactfolio research teamPublished 5 min read

A stock gap is a jump in price between one trading day and the next, with no trading in between. A gap up is when a stock opens above the previous day’s high. A gap down is when it opens below the previous day’s low. On a price chart, this leaves an empty space, which is where the name comes from.

Key points#

  • Gaps happen because news arrives while the main market is closed, such as earnings released after 4 p.m.
  • Gap up means the stock opened higher than the prior day’s high. Gap down means it opened lower than the prior day’s low.
  • A gap fill is when the price later moves back to where it was before the gap. Some gaps fill quickly, and many never do.
  • Gaps can make stop orders sell far below the price you set.
  • Chart readers name four types of gap: common, breakaway, runaway and exhaustion.

What is a gap in stocks?#

US stock exchanges hold their regular session from 9:30 a.m. to 4 p.m. Eastern time (NYSE). Some trading happens before and after those hours, but far fewer people take part.

When big news comes out overnight, buyers and sellers change their minds about the price. By the next morning’s open, the new price can be far from yesterday’s. The chart shows a jump instead of a smooth line. That jump is the gap.

Some traders use a looser definition. They call any open above yesterday’s close a gap up, even if it is still below yesterday’s high. Both uses are common, so check how a chart tool or screener defines it.

What causes a stock to gap up or down?#

Most gaps come from news released while the main market is closed. Common causes:

  • Earnings reports. Many companies report after the close or before the open.
  • Company news, such as a merger, a product failure, a lawsuit or a change of CEO.
  • Economic news, such as jobs or inflation numbers released before the open.
  • World events overnight, such as an election result or a sudden crisis.
  • Analyst rating changes published before the open.

Prices can also move in extended-hours trading before and after the main session. The SEC warns that these sessions often have fewer traders, wider price swings and prices that may not match the next day’s open (Investor.gov).

A stock gap example#

Say a stock closes at $100 on Tuesday. Its high that day was $101 and its low was $99.

After the close, the company reports weak sales. On Wednesday, the first trade is at $90. That is a gap down of $9 below Tuesday’s low, or 10% below Tuesday’s close.

Now say you owned the stock and had a stop order at $95. A stop order becomes an order to sell at the market price once the stock reaches your stop price (Investor.gov). The stock never traded at $95. It jumped straight to $90. So your shares would sell near $90, not $95.

That is one of the biggest risks of gaps. Stop orders protect less than many people think. Our guide to stop-loss orders covers the other types.

Types of gaps#

Chart readers often sort gaps into four types. These are labels from technical analysis, not proven rules:

TypeWhere it shows upWhat chart readers think it means
Common gapInside a quiet trading rangeLittle meaning, often fills soon
Breakaway gapAt the start of a new trendA big shift in what traders think
Runaway gapIn the middle of a strong trendThe trend may keep going
Exhaustion gapNear the end of a long trendThe trend may be running out of steam

The problem is that you often know which type a gap was only after the fact. In the moment, a breakaway gap and an exhaustion gap can look the same.

What does “gap fill” mean?#

A gap fills when the price moves back to the level it jumped from. In our example, the gap fills if the stock climbs back to $99, Tuesday’s low.

You may hear that “all gaps get filled”. That is not true. Some gaps fill within hours. Others never fill, especially after major news that changes a company’s value. Treat any rule about gap fills as an idea to test, not a promise.

Common mistakes#

  • Relying on stop orders to cap losses through earnings. A gap can skip right past them. Some traders buy a put instead, which sets a floor price (see put vs call).
  • Assuming every gap will fill and betting on it.
  • Chasing a big gap up at the open, when prices often swing the most.
  • Trading in pre-market hours without knowing that prices there can be thin and jumpy.
  • Ignoring the news behind the gap. The cause matters more than the chart shape.
  • Holding leveraged trades, such as CFDs, through big news. A gap can wipe out the deposit before you can act.

Try it on Tactfolio#

Gaps are one reason the timing of trades matters. Tactfolio backtests trade at the day’s close and also show a second line that trades at the next day’s open. If the two lines are far apart, overnight moves have a big effect on that strategy. What a backtest simulates explains both lines. You can see the effect on a simple trend rule like the 200-day moving average strategy, applied to the S&P 500. Fast price moves are also part of momentum stocks.

Common questions#

What does it mean when a stock gaps up?#

It means the stock opened above the previous day’s high, usually after good news while the market was closed. There is no trading in the space between the two prices. Some traders use the previous close instead of the previous high.

Is a gap down a good time to buy?#

Not by itself. A gap down tells you sellers reacted to something, often real bad news. Some stocks recover and some keep falling. The reason for the gap matters more than its size.

Do all stock gaps get filled?#

No. Many gaps fill, but many don’t, especially after earnings or major news that changes a company’s outlook. There is no rule that a gap must fill.

How do you find stocks that are gapping?#

Many brokers and charting sites offer pre-market screeners that list stocks trading well above or below yesterday’s close. Be careful with pre-market prices, because fewer people trade then and prices can change quickly at the open.

What is the difference between a gap and a trading halt?#

A gap is a price jump between sessions. A trading halt is when an exchange stops trading in a stock for a while, often for pending news (Investor.gov). A halt can lead to a gap when trading resumes.

Sources

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