# Understanding Stock Gaps: Types, Examples, and Trading Insights

## What Is a Stock Gap?

A stock gap represents a discontinuity in a security's price on a chart, often caused by impactful news or events outside of regular trading hours. These gaps can signal potential market shifts, and understanding the four types—common, breakaway, runaway, and exhaustion—helps traders make informed decisions.

### Key Takeaways

*   A stock gap is a discontinuity in a security's price chart that occurs when the price jumps higher or lower from the previous day's close without trading in between.
*   The four main types of gaps are common gaps, breakaway gaps, runaway gaps, and exhaustion gaps, each carrying distinct implications for market trends.
*   Traders may use gap analysis to identify potential buy or sell opportunities, but misinterpreting the type of gap can lead to significant financial mistakes.
*   Gaps often occur due to news or events affecting market sentiment, and many gaps get filled as prices adjust back to pre-gap levels.

## How to Interpret Stock Gaps

Gaps typically occur when a piece of news or an event causes a flood of buyers or sellers into the security. It results in the price opening significantly higher or lower than the previous day’s closing price. Depending on the gap type, it may signal the start of a new trend or reversal of an old one.

[Gapping](https://www.investopedia.com/terms/g/gapping.asp) occurs when the price of a security or asset opens well above or below the previous day’s [close](https://www.investopedia.com/terms/c/closingprice.asp) with no trading activity in between. Partial gapping occurs when the [opening price](https://www.investopedia.com/terms/o/openingprice.asp) is higher or lower than the previous day’s close but within the previous day’s price range. Full gapping occurs when the opening is outside of the previous day’s range. Gapping, especially a full gap, shows a strong shift in sentiment that occurred overnight.

Some traders make it a strategy to profit from [playing the gap](https://www.investopedia.com/articles/trading/05/playinggaps.asp) when such a situation occurs.

There are limitations despite gaps being easy to spot. The glaring flaw is one's own ability to identify the different types of gaps that occur. If a gap is misinterpreted, it could be a disastrous mistake causing one to miss an opportunity to either buy or sell a security, which could weigh heavily on one's profits and losses.

## Exploring the Different Types of Stock Gaps

There are some fundamental differences between the different types of gaps: [common gaps](https://www.investopedia.com/terms/c/commongap.asp), [breakaway gaps](https://www.investopedia.com/terms/b/breakawaygap.asp), [runaway gaps](https://www.investopedia.com/terms/r/runawaygap.asp), and [exhaustion gaps](https://www.investopedia.com/terms/e/exhaustiongap.asp).

*   **Common Gap:** In general, there is no major event that precedes a common gap. Common gaps generally get filled relatively quickly (usually within a couple of days) when compared to other types of gaps. Common gaps are also known as "area gaps" or "trading gaps" and tend to be accompanied by normal average trading volume.
*   **Breakaway Gap:** A breakaway gap occurs when the price gaps above a [support or resistance](https://www.investopedia.com/trading/support-and-resistance-basics/) area, like those established during a [trading range](https://www.investopedia.com/terms/t/tradingrange.asp). When the price breaks out of a well-established trading range via a gap, that is a breakaway gap. A breakaway gap could also occur out of another type of chart pattern, such as a triangle, [wedge](https://www.investopedia.com/terms/w/wedge.asp), cup and handle, [rounded bottom](https://www.investopedia.com/terms/r/roundingbottom.asp) or top, or head and shoulders pattern.
*   **Runaway Gap:** A runaway gap, typically seen on charts, occurs when trading activity skips sequential price points, usually driven by intense investor interest. In other words, there was no trading, defined as an exchange of ownership in security, between the price point where the runaway gap began and where it ended.
*   **Exhaustion Gap:** An exhaustion gap is a technical signal marked by a break lower in prices (usually on a daily chart) that occurs after a rapid rise in a stock's price over several weeks prior. This signal reflects a significant shift from buying to selling activity that usually coincides with falling demand for a stock. The implication of the signal is that an upward trend may be about to end soon.

Each gap type affects traders differently. Reversal and breakaway gaps often see a sharp rise in trading volume, unlike common and runaway gaps. Most gaps occur after news events, earnings, or analyst upgrades/downgrades.

Common gaps occur more frequently and often without a clear reason. They usually get filled, while other gaps might signal a trend change or continuation.

## Real-World Stock Gap Examples

In the example below of Amazon.com Inc. ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)), a small stock gap occurred between Oct. 26, 2023, and Oct. 27, 2023, when the price jumped from $119.57 to $127.74. This was a reversal of a downward trend which saw the stock's price continue to climb.

![Amazon Stock Chart](https://www.investopedia.com/thmb/jc2cKTtBO5LRVZv9hYgbNsRvR9s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2023-11-24at10.58.25AM-c02b8a28d65d4ce7b8da2753b1396328.png)

**

In the next example, of Alphabet Inc. ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=googl)), a gap can be seen from Oct. 24, 2023, to Oct. 25, 2023, when the price fell from $138.81 to $125.61 after weeks of a general price increase. The gap drop did not result in a continued downward trend, instead, the price continued to increase to its pre-gap level, filling the gap.

![Google Graph](https://www.investopedia.com/thmb/t264MKNPp9-yUgtEr2fxMaG6I0M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2023-11-24at10.52.14AM-ba29f7854ee64f66a426b6a5f6cf6cfa.png)

**

## Why Do Stock Gaps Fill?

A stock gap is a large jump in a stock's price after the market closes, usually due to some news. When a gap has been filled, this means the stock's price has returned to its "normal" price; the pre-gap price. This happens quite often as the price settles after irrational buying and trading has stopped after the news.

## What Is Price Gap Risk?

Price gap risk is the risk that a security's price will fall or increase dramatically from a market close to a market open, without any trading in between. Traders should plan for price gap risk, such as by closing out orders at the end of the day or putting in stop-loss orders.

## How Often Do Stocks Gap?

The amount of times stocks gap really depends on the time frame that a trader is viewing and making trades. The shorter the time frame, the more frequent the gaps. So a daily chart would have more gaps than a monthly chart.

## The Bottom Line

Stock gaps occur when an asset’s price jumps significantly between trading sessions due to news or events, leaving a discontinuous space on the chart. These gaps can signal the beginning of a trend or its reversal, depending on their type. It is crucial for traders to accurately identify these gaps—common, breakaway, runaway, or exhaustion—and their causes, as misinterpretation can lead to missed opportunities or losses.

Trading strategies might include playing the gap or managing price gap risk with stop-loss orders. Understanding the implications of different gap types helps investors make informed decisions in response to market shifts

> **Article Sources**
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