A price gap is a situation where the price of a security moves sharply up or down with no trading occurring in between, typically happening between the close of one trading session and the open of the next.
Mechanics of price gaps
For you Elephants trading on global markets, a price gap appears as a visible blank space on a price chart. It occurs when market sentiment changes while an exchange is closed. Corporate announcements or macroeconomic data releases often happen outside of standard trading hours. Market participants process this new information overnight and adjust their buy and sell orders accordingly. When the exchange opens the next morning, the opening price is substantially different from the previous day’s closing price.
These price movements are common across all regional exchanges with fixed daily trading hours, such as the London Stock Exchange or the Tokyo Stock Exchange. They are less frequent in continuous markets like foreign exchange. Technical analysts categorize these movements based on where they appear within a broader price trend. Common gaps happen during normal trading periods. Breakaway gaps occur at the start of a new price trend. Runaway gaps appear in the middle of a trend, and exhaustion gaps signal the end of a price movement.
You will often hear traders discuss the concept of a gap “filling.” This refers to a scenario where the price of the security eventually reverses and trades back through the empty price range. A gap is filled when the price reaches the original pre-gap closing price. This reversal can happen within the same trading day or take weeks to materialize.
Example
Consider a publicly traded agricultural firm called Savannah Elephant Feed Ltd, listed on the Johannesburg Stock Exchange. On Thursday afternoon, the stock closes at 20 rand per share. Thursday evening, the company announces the invention of a high-calorie dietary supplement specifically designed for rehabilitating rescued elephants. The news generates high demand from international wildlife reserves. When the market opens on Friday morning, the influx of overnight buy orders causes the stock to open directly at 28 rand per share. The empty space on the chart between 20 rand and 28 rand is a price gap.