Every trader knows the feeling: you check your portfolio at market open and find prices have jumped—or dropped—significantly from yesterday's close. These overnight gaps represent one of the most information-rich phenomena in technical analysis, yet many investors treat them as noise rather than signal.

Gaps occur when new information or sentiment shifts emerge while markets are closed, forcing prices to adjust instantly at the open rather than transitioning gradually. This discontinuity in price action carries substantial diagnostic value. The type of gap, its context within the broader trend, and the volume accompanying it all provide clues about what smart money is doing and where prices may head next.

Understanding gap analysis requires moving beyond simple pattern recognition toward a framework that integrates market psychology, statistical tendencies, and risk management. Not all gaps are created equal, and the trading implications vary dramatically based on classification and context.

Technical analysts traditionally identify four primary gap types, each carrying distinct implications. Common gaps appear during sideways trading ranges and typically lack significance—they're market noise created by thin overnight volume and fill quickly. These gaps tell us little about directional conviction.

Breakaway gaps are the attention-grabbers. They occur when price jumps out of a consolidation pattern or trading range, often accompanied by heavy volume. This gap type signals that a significant supply-demand imbalance has emerged, usually driven by fundamental news or a technical breakout that triggers institutional repositioning. Breakaway gaps at the start of trends often remain unfilled for extended periods.

Runaway gaps, sometimes called measuring gaps, appear mid-trend and suggest strong momentum continuation. They indicate that one side of the market has become dominant and the other side is capitulating. When you see a runaway gap on elevated volume, the trend has likely entered an acceleration phase where price discovery is happening rapidly.

Exhaustion gaps appear near trend endings and represent the final gasp of a move. They often occur after a series of prior gaps and tend to fill quickly—sometimes within days. The exhaustion gap shows up when the last buyers rush in at tops or the last sellers panic out at bottoms, creating a vacuum that promptly reverses.

Takeaway

Context determines meaning: a gap's location within the broader trend structure matters more than the gap itself. A gap breaking out of a six-month base carries fundamentally different implications than an identical-sized gap occurring late in an extended rally.

One of the most persistent beliefs in trading is that gaps always fill. The reality is more nuanced. Research across various markets suggests that roughly 70-80% of gaps eventually fill, but eventually can mean anything from hours to years. The actionable question isn't whether a gap fills, but how quickly and under what conditions.

Common gaps within trading ranges fill most reliably—often within the same session or within several days. The statistical tendency is strong enough that fading these gaps (betting on a fill) can form the basis of systematic strategies. However, breakaway gaps tell a different story. Studies of major breakouts show that gaps occurring on volume surges exceeding 150-200% of average volume fill less than 40% of the time within the following month.

Several factors influence fill probability. Volume context ranks highest—gaps on low volume fill more reliably than gaps on high volume. Trend alignment matters too: gaps in the direction of the prevailing trend fill less often than counter-trend gaps. Market regime plays a role as well; during high-volatility periods, gaps tend to fill faster as price ranges expand and revisit prior levels.

The gap fill tendency also varies by asset class. Individual stocks show higher fill rates than indices, partly because idiosyncratic risk creates more price reversals. Commodity futures and forex gaps behave differently still, influenced by their unique market structures and trading hours.

Takeaway

Treat gap fill statistics as base rates that shift based on context. High-volume breakaway gaps in trending markets are the exception that proves the rule—they often mark the start of moves that leave the gap permanently behind.

Converting gap analysis into trading decisions requires integrating multiple information streams. The first step is pre-market preparation: before the open, identify whether overnight gaps align with or contradict the prevailing trend, and note the apparent catalyst. Gaps driven by earnings or major news carry different implications than gaps emerging from general market sentiment shifts.

For gap fading strategies—betting that a gap will fill—the ideal setup combines a common gap in a range-bound market with below-average pre-market volume and no clear fundamental catalyst. Entry timing matters: many traders wait 15-30 minutes after the open to let initial volatility settle before positioning. Stops should sit beyond the gap's extremity with enough buffer to avoid getting caught by early-session noise.

Gap continuation strategies apply when breakaway or runaway gap characteristics appear. Here, traders look for early confirmation: if a breakaway gap holds and volume remains elevated through the first hour, the probability of continuation increases substantially. Pullbacks to the gap area that hold on declining volume often present favorable entry points for trend participation.

Risk management with gaps requires acknowledging their inherent uncertainty. Position sizing should reflect the wider-than-normal risk created by overnight moves. Some traders reduce standard position sizes by 30-50% when trading gap setups, allowing for the increased volatility while maintaining consistent portfolio risk exposure.

Takeaway

Never trade a gap in isolation. Combine gap type classification with volume analysis, trend context, and catalyst assessment before committing capital. The most reliable setups occur when multiple factors align in the same direction.

Gap analysis offers a window into the market's overnight deliberations—the collective repricing that occurs when new information meets investor psychology. By classifying gaps accurately and understanding their statistical tendencies, traders gain an edge in interpreting what these price discontinuities actually communicate.

The framework matters more than memorizing specific patterns. Ask whether the gap represents new information triggering a regime change, or merely noise within an established range. Evaluate volume, trend context, and catalyst quality before drawing conclusions.

Like most technical tools, gap analysis works best as one input among several. Combined with broader market assessment and disciplined risk management, understanding overnight price jumps becomes a meaningful addition to any market participant's analytical toolkit.