## Gaps in Asset Trading: A Complete Guide for Traders

What is a gap in the context of financial markets? It is a price chart discontinuity that occurs when an asset opens with a significant deviation from the previous close. Such jumps create a visual gap and can present both opportunities and risks for experienced and novice traders.

## Why Do Gaps Form?

Price gaps do not occur randomly. The main catalysts include:

**Macroeconomic Factors** — changes in key interest rates, unexpected economic reports, or central bank decisions often cause sharp capital movements between assets.

**Corporate Events** — release of quarterly earnings, merger announcements, acquisitions, or management changes can cause radical revaluation of a company overnight.

**Market Sentiment Changes** — panic selling or a sudden surge of optimism among investors often lead to opening positions far from the previous levels.

**Order Imbalance** — when at the start of a session there are more buy orders than sell orders (or vice versa), the price is forced to jump to execute them.

## The Two Main Types of Gaps

**Bullish (upward) gap** occurs when the opening is above the previous session's close. It often signals positive market perception and may indicate the continuation of an upward trend.

**Bearish (downward) gap** is characterized by opening below the previous close. This scenario usually reflects negative news or loss of investor confidence and may foreshadow further price decline.

## Price Movement Features After Gaps

After a gap forms, traders observe increased volatility. Prices make jumps with minimal trading activity in between, creating conditions for both quick profit realization and rapid losses.

Important note: approximately 70-80% of the time, the price eventually returns to a level between the previous session's close and the current open. This process is called "gap filling" and represents a separate trading scenario.

## Practical Trading Approaches

**Trend Inertia Strategy** — the trader enters a position in the direction of the gap, assuming the price will continue moving. For example, with an upward gap, they open a long position, expecting further growth.

**Reversal Strategy** — the opposite approach. The trader assumes the gap will be filled and takes a position in the opposite direction. With an upward gap, this means selling with the expectation of a price decline back.

**Breakout Strategy** — the trader waits for the price to break through the upper or lower boundary of the gap, then enters a position. This approach requires careful analysis of support and resistance levels.

## Practical Examples

**Growth Scenario:** The stock closes at $48. Overnight, the company announces a profitable quarter and contracts with major clients. The next day’s open: $54. The gap size is $6. A trader following the inertia strategy enters a long position, expecting further growth to $60-62.

**Decline Scenario:** The stock closes at $82. Overnight news reports a quarterly revenue decline. The open: $75. The downward gap is $7. The trader can either open a short position expecting further decline or wait for the gap to fill and then go long, anticipating a rebound to $80-81.

## Classification of Gaps by Types

**Exhaustion Gap** — usually appears at the end of a strong trend, signaling a reversal. This gap is often accompanied by increased trading volume and is a caution signal.

**Initial (breakaway) Gap** — indicates the start of a new trend and is usually followed by significant price movement in one direction.

**Runaway Gap** — occurs in the middle of a trend and accelerates its development. The price typically does not return to this area soon.

**Measuring Gap** — helps traders estimate the potential distance the price may move. The size of the gap often corresponds to the subsequent movement.

## Critical Risks and Position Management

The main danger is trying to catch a gap without an exit plan. Volatility after the gap can turn the position against the trader within minutes.

False breakouts are common, where the price breaks the upper or lower boundary of the gap but then sharply reverses, triggering stop-losses of many traders.

Risk management policies should include:
- Setting stop-losses above (short) or below (long) the gap boundary
- Reducing position size for gap trades (no more than 2-3% of the portfolio per trade)
- Monitoring economic calendar for potential gap triggers
- Analyzing trading volumes to confirm the strength of the move

## Algorithm for Successful Gap Trading

Before the market opens, carefully study news and events that could influence asset prices. Analyze previous gaps of the specific asset: what sizes were typical and how often they filled.

Determine which strategy you will use — inertia or reversal. Accordingly, select entry and exit levels. Always remember that trading gaps requires quick decision-making and strict discipline.

Keep in mind: a gap is not just a technical phenomenon but a direct reflection of market participants’ fears and hopes. Understanding the psychology behind each gap will help you make more informed trading decisions.