Gap Fill: Understanding the Market Tendency to Close Price Gaps

In trading, a “gap” refers to a price area on a chart where no trading has occurred, creating a visible space between two consecutive bars or candles. A “gap fill” describes the market tendency for prices to move back and fill this gap after an initial price jump or drop. This phenomenon is common across various markets, including stocks, indices, forex, and CFDs, and is closely watched by traders looking for potential entry or exit points.

Why Do Gaps Occur?

Gaps often happen due to significant news, earnings surprises, or external shocks that cause prices to open sharply higher or lower than the previous close. For example, a company reporting better-than-expected earnings after market hours might see its stock price jump at the next opening, creating a gap on the chart. Similarly, economic data releases or geopolitical events can cause gaps in indices or forex pairs.

What Is Gap Fill?

After a gap forms, the price often retraces back to cover the gap area, essentially “filling” it. This means the price moves back to the level where trading was skipped during the gap. This tendency is rooted in market psychology and technical factors. Gaps can represent overreactions, liquidity imbalances, or unfilled orders that the market later revisits.

There are generally three types of gaps:

1. Common Gaps – Usually small and often quickly filled.
2. Breakaway Gaps – Occur at the start of a trend and may not fill for a long time.
3. Exhaustion Gaps – Appear near the end of a trend and often get filled quickly.

Formula for Gap Size:

Gap Size = Opening Price (current period) – Closing Price (previous period)

Understanding this formula helps traders quantify the gap and set targets for potential fills.

Real-Life Example:

Consider the stock of Apple Inc. (AAPL) on a day when it reported quarterly earnings that beat expectations. The stock closed at $150 and opened the next session at $160, creating a $10 upward gap. However, over the next few trading hours, Apple’s price retraced back to $152 before resuming its upward movement. This retracement filled most of the gap. Traders who anticipated a gap fill could have capitalized on this move by entering short positions after the initial jump and exiting near the gap fill level.

Common Mistakes and Misconceptions

One common misconception is that all gaps will eventually be filled. While many gaps do get filled, some, especially breakaway gaps that signal strong new trends, may remain unfilled for extended periods or indefinitely. Assuming every gap must be filled can lead to premature trades and losses.

Another mistake is ignoring the type of gap and the market context. For example, gaps during earnings season behave differently from gaps caused by technical breakouts. Traders should also consider volume and momentum indicators to assess the likelihood of a gap fill.

Related Queries Traders Often Search For

– What is a gap fill in trading?
– How to trade gap fills effectively?
– Do all gaps get filled?
– What causes price gaps in forex and stocks?
– Gap fill strategies for day trading.

Conclusion

Gap fills are a useful concept for intermediate traders looking to understand price behavior after abrupt moves. Recognizing the type of gap, measuring the gap size, and analyzing market context can help traders develop more informed strategies. While gaps often get filled due to market psychology and order flow dynamics, it’s important to avoid assuming every gap will fill and to factor in broader market trends and news.