A price discontinuity between two consecutive trading periods where no trading occurs, visible as a blank space on a candlestick chart.
A gap is a price range on a chart where no trading takes place between the close of one session and the open of the next. On a Candlestick Chart, it appears as a blank area. A "gap up" occurs when the opening price is higher than the previous day's high, and a "gap down" when it opens below the previous day's low.
Gaps are classified into four types: Common gaps (small, occur frequently in range-bound markets, usually fill quickly), Breakaway gaps (occur at the start of a new trend, often at the end of a Consolidation phase, usually do not fill), Runaway or Continuation gaps (occur mid-trend, confirming the trend's strength), and Exhaustion gaps (occur near the end of a trend, soon followed by a reversal — often a Bull Trap or Bear Trap in disguise).
In Indian markets, gaps are extremely common due to overnight news flow. Since Indian markets (9:15 AM - 3:30 PM IST) are closed during US and European trading hours, any significant global event triggers a gap at the next Indian open. For example, a US Fed rate decision at 11:30 PM IST can cause the Nifty to gap up or down 1-3% at the next morning's open. Quarterly results announcements (made after market hours) cause individual stock gaps of 5-15%.
The concept of "gap fill" is widely followed by Indian traders. The theory suggests that gaps tend to be filled — the price eventually returns to the gap area. While common gaps fill frequently (often within days), breakaway gaps at the start of strong trends may never fill. For instance, if TCS gaps up from Rs 3,500 to Rs 3,700 on stellar results, a common gap might fill back to Rs 3,500, but a breakaway gap might never return to that level if the earnings momentum continues.
For traders, gaps create both opportunities and risks. Gap-and-go strategies involve buying a stock that gaps up on volume, expecting the momentum to continue. Gap-fill strategies involve fading the gap — shorting a gap-up or buying a gap-down — expecting the price to return to the previous close. During the NSE pre-open session (9:00-9:15 AM), the equilibrium price is calculated which determines the magnitude of the opening gap. Watching pre-open order flow provides clues about the likely gap direction and size.