Stock Gaps: 4 Types of Gaps and What Each One Signals
You open your stock chart this morning and notice the price opened far higher than yesterday's close - there is an empty space on the chart with no candlesticks at all. That is what we call a gap. Gaps do not happen randomly - they appear because something shifted market sentiment outside of trading hours.
Quick answer: A gap is an empty area on a price chart where no trading occurred. There are 4 main types of gaps - Common Gap, Breakaway Gap, Runaway Gap, and Exhaustion Gap - and each one carries a different signal about what is likely to happen next.
In this article, we will break down each type of gap, how to tell them apart, the myth that "all gaps must be filled," real examples from Bursa Malaysia, and trading strategies based on gap type.
What Is a Gap in Stock Charts?
According to Investopedia, a gap is an area on a price chart where the price of an asset moves sharply up or down with no trading occurring in between. In other words, there is an "empty space" between the closing price of one session and the opening price of the next.
Gap Up vs Gap Down
Two basic directions of a gap:
- Gap Up - today's opening price is higher than yesterday's high. This indicates strong positive sentiment, usually driven by good news or financial results that exceeded expectations.
- Gap Down - today's opening price is lower than yesterday's low. This signals negative sentiment, possibly caused by bad news or a macroeconomic shock.
Why Do Gaps Form?
Some common reasons gaps form on Bursa Malaysia:
- Earnings announcements - a company reports a profit surge or a surprising loss after trading hours.
- Corporate news - announcement of a major contract, acquisition, or management change.
- Global market movements - if the US or Asian markets dropped sharply the night before, Bursa stocks tend to gap down at the open.
- Government policy changes - announcements of new taxes, subsidies, or industry policies that affect specific sectors.
The key point: not all gaps carry the same meaning. The gap's location within a trend, trading volume, and market context determine whether it is a reliable signal or just market noise.
If you are just starting to learn technical analysis, make sure you already understand the basics like support, resistance, and trend. We have a complete guide at Technical Analysis Overview Guide.
4 Types of Gaps Every Investor Should Know
Gap analysis theory was introduced and developed by technical experts such as Richard W. Schabacker and Edward Magee. Fundamentally, gaps can be categorized into 4 types based on where they appear within the context of a trend and what signal they carry. According to StockCharts ChartSchool, each of these four types provides very different information to traders.
1. Common Gap
A common gap is the most frequently occurring and least significant type of gap. It usually appears in a market that is moving sideways or in a consolidation phase, without any clear news catalyst.
Key characteristics:
- The gap size is usually small - just a few cents for Bursa Malaysia stocks.
- Trading volume on the gap day does not increase significantly compared to normal days.
- This gap is almost always filled within a few days - the price returns to the pre-gap level.
- It does not change the existing trend direction.
Common gaps occur due to minor imbalances in opening orders, but conditions return to normal quickly. It is not a signal to enter or exit a position.
What you should do: Ignore it. A common gap provides no meaningful information about the next price direction. If you already hold a position, there is no reason to panic or get excited.
2. Breakaway Gap
A breakaway gap is the most important gap for traders looking for the start of a new trend. It occurs when the price breaks out of a consolidation pattern, trading range, or chart formation with a gap accompanied by a significant volume surge.
Key characteristics:
- The gap occurs at a breakout point from chart patterns such as triangles, rectangles, cup and handle, or support/resistance zones that have held for a long time.
- Volume surges sharply - usually 2-3 times the average daily volume. This is the most important confirmation.
- This gap rarely fills in the short term. If it fills quickly, that is a sign the breakout has failed (false breakout).
- It signals the start of a new trend - either a new uptrend or downtrend.
Why do breakaway gaps happen? Imagine a stock that has been moving sideways for 3 months. Suddenly, the company announces a major contract. On the next opening, a flood of buy orders pours in simultaneously, causing the price to jump far past resistance. This is a breakaway gap - the beginning of a new journey. For a deeper understanding of breakout concepts, read Types of Stock Breakouts.
What you should do: A breakaway gap with high volume is one of the strongest technical signals. Many professional traders enter positions on the breakaway gap day or on a small pullback after the gap, as long as the price does not close the gap entirely.
3. Runaway Gap (Continuation Gap)
A runaway gap - also known as a measuring gap or continuation gap - occurs in the middle of an existing trend. It confirms that the trend's momentum is still strong and will most likely continue.
Key characteristics:
- The gap appears after the price has already been moving in one direction for some time - not at the start of a trend.
- Volume increases but is not as extreme as a breakaway gap.
- This gap usually does not fill in the short term as long as the trend is still active.
- It is called a "measuring gap" because some analysts use it to estimate price targets - the distance from the start of the trend to the gap is often equal to the distance from the gap to the end of the trend.
Runaway gaps occur because investors who were initially hesitant start seeing the trend as real and begin entering positions. It is a sign that the trend is not over yet - there is still fuel to go further.
What you should do: If you are already in a position, a runaway gap is a good confirmation - hold and let the trend work for you. If you have not entered yet, a runaway gap can be an entry opportunity, but you need to be more careful since part of the move has already happened. Always use a stop loss below the gap.
4. Exhaustion Gap
An exhaustion gap is a gap that appears near the end of a trend and is usually followed by a reversal. It often traps traders who get excited thinking the trend is still strong, when it is actually signaling that the trend is about to end.
Key characteristics:
- The gap occurs after a trend that has been running for a long time - the price has already risen (or fallen) significantly over several weeks or months.
- Volume on the gap day is usually very high - often the highest volume in the entire trend. This reflects the final participation of "late buyers" driven by FOMO.
- After the gap, the price fails to move further in the trend's direction. Typically within 1-3 days, the price starts falling back and the gap fills completely.
- The gap fill is followed by a trend change - from uptrend to downtrend or vice versa.
According to Investopedia, an exhaustion gap marks the point where the last buyers have entered the market. There is no more new demand to push the price higher, and selling pressure starts to build as early investors take profits.
What you should do: Be cautious if you see a gap after a long trend with very high volume. This is not the time to open a new position. If the gap fills within a few days, that is strong confirmation that a reversal is underway.
How to Identify Each Gap Type
You usually will not know the gap type for certain until a few days later. But there are three main clues for an initial assessment:
1. Check Volume
Volume is the most important key in evaluating gaps:
- Low/normal volume - most likely a Common Gap. Ignore it.
- High volume at a breakout point - most likely a Breakaway Gap. Pay serious attention.
- Moderately increased volume in the middle of a trend - likely a Runaway Gap.
- Very high volume after a long trend - likely an Exhaustion Gap. Be cautious.
2. Look at the Position Within the Trend
Where the gap appears within a trend tells you a lot:
- No clear trend (sideways) - Common Gap.
- Start of a new trend, breaking out of a pattern - Breakaway Gap.
- Middle of an active trend - Runaway Gap.
- After a trend that has been running for a long time - Exhaustion Gap.
3. Does the Gap Fill?
Whether the gap fills in the first few days provides additional clues:
- Filled within 1-3 days - Common Gap or Exhaustion Gap.
- Not filled, price keeps moving in one direction - Breakaway Gap or Runaway Gap.
Combine all three clues for a clearer picture of the gap type you are dealing with.
Do All Gaps Have to Fill? Myth vs Reality
One of the most popular beliefs among traders is that "all gaps must be filled." This belief holds that the price will always return to the pre-gap level to "fill" the empty space. But is this true?
Half true, half myth.
Statistically, the majority of gaps eventually fill - but "eventually" can mean a few days, a few weeks, or even a few years. Here is the more accurate reality:
- Common Gap - yes, almost always fills within a short time (days to weeks). The "gaps must be filled" belief does apply here.
- Breakaway Gap - often does NOT fill for a long time. If a breakaway gap fills quickly, that is not a healthy gap fill - it means the breakout has failed.
- Runaway Gap - usually does not fill as long as the trend is still active. It may only fill after the overall trend has ended.
- Exhaustion Gap - fills quickly, and this is actually confirmation that it was indeed an exhaustion gap. The gap fill is a signal that a reversal is underway.
So, not all gaps need to be filled immediately. The gap type determines whether the fill is meaningful or not. Traders who blindly buy every gap down without understanding the gap type will frequently suffer losses - especially when it is a breakaway gap to the downside signaling the start of a new downtrend.
Gap Examples on Bursa Malaysia
Gaps occur every week on Bursa Malaysia. Here are examples that illustrate each gap type:
Breakaway Gap - Construction Stocks
When the government announces mega projects such as MRT3 or major infrastructure contracts, stocks like Gamuda often show breakaway gaps. The price that was previously moving sideways suddenly gaps up at the open with volume doubling. This signals the start of a new rally driven by a clear fundamental catalyst.
Runaway Gap - Technology Stocks
Stocks like Inari Amertron and Frontken have shown runaway gaps during the semiconductor rally. After an uptrend had already started several weeks earlier, the price gapped up again mid-trend - confirming that momentum was still strong and new investors were still entering.
Exhaustion Gap - Glove Stocks During COVID
Top Glove is a classic example of an exhaustion gap. During the peak of the 2020 glove stock frenzy, the price gapped up with record-breaking volume - but that turned out to be the top. The price started falling and never returned to those highs. Investors who entered on that gap were trapped in a prolonged downtrend.
Common Gap - Blue Chip Stocks
Blue chip stocks like Maybank and Tenaga Nasional frequently show small common gaps at the open. These gaps are usually just a few cents, occur without any important news, and fill within the same session or the next day. They carry no meaningful signal.
Gap Down - Negative News Impact
Stocks like Dialog Group have shown significant gap downs when hit by shocking negative news. A breakaway gap down with high volume signals the start of serious new selling pressure, and it often takes a long time before the price recovers.
Trading Strategies Based on Gaps
Now that you understand the 4 types of gaps, how can you use them in actual trading strategies? Here is the approach for each type:
Strategy 1: Fade the Common Gap
Common gaps almost always fill, so some traders use a "fade" strategy - trading in the opposite direction of the gap. If a stock gaps down on a common gap, they buy expecting the price to rise back to the pre-gap level. Important: This strategy only works if you are certain it is a common gap (low volume, no news). If it is actually a breakaway gap, you will be trading against a new trend.
Strategy 2: Buy the Breakaway Gap
A breakaway gap with high volume is one of the best entry signals. Enter a position on the gap day or on a small pullback after the gap. Place a stop loss below the bottom of the gap - if the price fills the gap completely, the breakout is considered failed.
Strategy 3: Ride the Runaway Gap
If you already hold a position, keep it and raise your stop loss to the bottom of the gap. If you have not entered yet, use the gap as a "measuring tool" - measure the distance from the start of the trend to the gap, project the same distance upward to get your price target. Always use a stop loss since part of the move has already occurred.
Strategy 4: Exit on Exhaustion Gap
An exhaustion gap is a signal to exit, not enter. If you see a gap up after a long trend with very high volume, consider taking profits or reducing your position size. If the gap fills within 2-3 days, that is strong confirmation to exit entirely.
Quick Summary: 4 Types of Gaps
| Gap Type | Location | Volume | Gap Fills? | Signal |
|---|---|---|---|---|
| Common Gap | Sideways | Low/normal | Yes, quickly | No meaningful signal |
| Breakaway Gap | Start of new trend | Very high | Rarely (short term) | New trend starting |
| Runaway Gap | Mid-trend | Moderately high | No (while trend active) | Trend still strong |
| Exhaustion Gap | End of trend | Very high | Yes, quickly | Trend nearly over |
FAQ
What is a gap in stocks?
A gap is an empty space on a price chart where no trading occurred. It forms when the opening price of one session differs significantly from the closing price of the previous session, caused by news or sentiment changes outside of trading hours.
How many types of gaps are there in technical analysis?
There are 4 main types: Common Gap (an ordinary gap with no meaningful signal), Breakaway Gap (a breakout gap signaling a new trend), Runaway Gap (a continuation gap confirming momentum), and Exhaustion Gap (a fatigue gap warning that the trend is nearly over).
Do all gaps have to be filled?
Not necessarily. Common gaps and exhaustion gaps usually fill quickly. However, breakaway gaps and runaway gaps can remain open for weeks or even years. The belief that "all gaps must be filled immediately" is a myth that can cause losses if used as a trading basis without context.
How do you differentiate between a breakaway gap and an exhaustion gap?
Both occur with high volume, but the context differs. A breakaway gap appears at the start of a new trend (after a sideways phase), while an exhaustion gap appears after a trend that has been running for a long time. A breakaway gap is followed by continued movement in one direction, while an exhaustion gap is followed by a reversal and gap fill.
Can gaps occur on Bursa Malaysia stocks?
Yes, gaps occur every week on Bursa Malaysia. Stocks like Petronas Chemicals, Sunway, and Mr DIY frequently display various types of gaps, especially after corporate announcements or global market movements.
Is volume important in gap analysis?
Extremely important. Volume is the primary differentiating factor between the 4 types of gaps. A gap with low volume is usually a common gap. A gap with high volume at a breakout point indicates a breakaway gap. A gap with the highest volume at the end of a long trend is often an exhaustion gap.
What is a "measuring gap" and how do you use it?
A measuring gap is another name for a runaway gap. Here is how to use it: measure the distance from the start of the trend to the gap, then project the same distance from the gap upward (for an uptrend). This target is not a guarantee, but it provides a useful guideline as a reference.
Should I trade based on gaps alone?
Not recommended. Gap analysis is most effective when combined with other indicators such as volume, moving averages, and candlestick patterns. Use gaps as one tool in your toolkit, not the only tool.
Conclusion
Gaps are not just empty spaces on a chart - they are footprints of market sentiment that tell you what is happening. By understanding the differences between the 4 types of gaps, you can make more informed trading decisions and avoid the traps that frequently catch investors who lack context.
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