A gap in a chart is essentially an empty space between one trading period and the previous trading period. They usually form because of an important and material event that affects the security, such as an earnings surprise or a merger agreement.
This happens when there is a large-enough difference in the opening price of a trading period where that price and the subsequent price moves do not fall within the range of the previous trading period. For example, if the price of a company’s stock is trading near $40 and the next trading period opens at $45, there would be a large gap up on the chart between these two periods, as shown by the figure below.
Gap price movements can be found on bar charts and candlestick charts but will not be found on point-and-figure or basic line charts. The reason for this is that every point on both point-and-figure charts and line charts are connected.
It is often said when referring to gaps that they will always fill, meaning that the price will move back and cover at least the empty trading range. However, before you enter a trade that profits the covering, note that this doesn’t always happen and can often take some time to fill.
There are four main types of gaps: common, breakaway, runaway (measuring), and exhaustion. Each are the same in structure, differing only in their location in the trend and subsequent meaning for chartists.
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