- The four kinds of gap and how to tell them apart
- Why some gaps fill quickly and others never do
- What a gap does to your risk management, and why stops don't protect you
Markets are closed for roughly eighteen hours a day and two days a week. Information arrives during that time. When trading resumes, the auction may reopen at a price far from where it closed — and the intervening range never traded at all.
Inside a gap, nobody holds a position — no cohort is trapped, no level was formed. That vacuum is why price can travel through a gap quickly in either direction, and why gaps often act as magnets in one case and as barriers in another.
The four kinds
- Common gapWhere it occurs: Inside a range, no newsWhat it means: Noise. Usually fills within days. Carries little information.
- Breakaway gapWhere it occurs: Out of a completed base, on heavy volumeWhat it means: Significant — a repricing that leaves the old range behind. Often does not fill.
- Runaway / measuring gapWhere it occurs: Mid-trend, in the direction of the moveWhat it means: Continuation with urgency. Frequently appears near the middle of a large move.
- Exhaustion gapWhere it occurs: Late in an extended move, often on climactic volumeWhat it means: The last buyers or sellers being drawn in. Frequently followed by reversal.
BREAKAWAY EXHAUSTION
┌─┐ ← gap up on
╱──── │ │ climactic
┌─┐╱ ╱└─┘ volume
│ │ ← gap out of base ╱
═══════╤════┘─┘ ╱
▁▁▁▁▁▁│▁▁▁ months of quiet base ╱ ← months of advance
dry volume, contraction ╱ already behind it
╱
Prior context: accumulation Prior context: extended markup
Likely: continuation Likely: the move is ending Do gaps get filled?
"All gaps get filled" is the most repeated and least reliable claim in technical analysis. Many common gaps do fill, and quickly. Breakaway gaps on genuine repricing frequently do not fill for years — and waiting for a fill that never comes is a well-worn way to miss an entire move.
- CommonFill tendency: Usually fills quicklyWhy: No repricing occurred — it was liquidity, not information
- Breakaway on heavy volumeFill tendency: Often unfilled for a long timeWhy: Genuine change in what participants believe the asset is worth
- Earnings or event gapFill tendency: Depends entirely on whether the information was durableWhy: A permanent change in the business is not retraced by supply and demand
- ExhaustionFill tendency: Usually fills, often rapidlyWhy: The final flurry was not backed by lasting demand
What a gap does to your risk
This is the part that matters more than any classification. A stop-loss order is an instruction to sell at the market once a price is touched. If the market never trades at your stop price — because it gapped straight past it — you are filled wherever the auction opens.
A position sized on the assumption of a 6% loss at the stop.
- Entry
- ₹840
- Stop placed at
- ₹790−6%
- Position size
- ₹4,00,000risking ~₹24,000
- Overnight event
- regulatory order
- Next open
- ₹672−20% gap
On a single session, DHFL fell as much as 60% intraday and closed down about 42%. Nothing had been announced by the company that morning; a mutual fund had sold a block of its paper at a sharply higher yield, which the market read as a funding crisis spreading from IL&FS across the whole NBFC sector.
The Sensex swung roughly 1,500 points intra-day, closing 280 points lower at 36,842. Yes Bank was down more than 29% cumulatively over that stretch after the RBI curtailed its founding CEO's term.
For anyone holding DHFL with a 10% stop, the stop was irrelevant. The stock traded through it in minutes on the way to −60%.
Indian equities gap more than many developed markets because a large share of information — results, regulatory orders, block deals, policy announcements — arrives outside market hours.
Two practical consequences. First, avoid holding concentrated positions through known event dates unless the event is the thesis. Second, circuit limits can compound the problem: a stock locked at a lower circuit cannot be exited at all, at any price, until it unlocks.
- ☐Where is it — out of a base, mid-trend, or late in an extended move?
- ☐What was the volume on the gap day relative to average?
- ☐Was there identifiable news, or did it gap on flow alone?
- ☐Did it hold the gap, or close the day back inside the prior range?
- ☐For a position: does my size still make sense given this instrument's gap history?
In one screen
- 1A gap is a price range with no positions in it — that vacuum drives its behaviour.
- 2Location and volume, not size, distinguish breakaway from exhaustion gaps.
- 3"All gaps fill" is false: genuine repricings often never fill.
- 4Stops cannot protect against gaps; position size is the only control that always works.
Check yourself
Nothing is scored or stored — the explanation after each answer is the point.
A stock gaps up 7% out of a five-month base on four times average volume, and holds the gap for the following week. What is the most likely classification?
Why is position size, rather than the stop-loss, the primary risk control?