Have you ever heard of the term Fill the Gap? It is often used in technical analysis when looking at a stock’s chart. The gap fill on a chart is one of the most basic forms of analysis. It is a visible cue rather than a recurring pattern and often comes from new information about the stock, company, or sector.
Are gap fills reliable for traders? Surprisingly yes. There are some unwritten rules about gaps on a chart. The number one rule about gaps? They almost always get filled! This article will explain what a gap fill is, what causes it, and what gaps you might encounter on a stock’s chart.
Table of Contents
What Is a Gap Fill in Stocks?
Unless you’re always looking at stock charts, missing a gap fill is easy. The stock chart is the only place you’ll be able to find one. So, is it easy to identify a gap fill? Absolutely!
A gap on a stock chart looks exactly as it sounds: a gap higher or lower between two candlesticks that break the continuity of the stock’s trajectory. It’s easier to see than explain, so here is an example of a gap on a stock chart.
Here is a daily chart of the SPDR S&P 500 ETF Trust, better known as SPY. I’ve marked three price levels where gaps have opened between candlesticks. Since the markets have been in a bullish uptrend in recent months, the gaps are all “gapping” higher.
This bullish move for SPY’s trend shows that some news or catalyst likely caused the S&P 500 to jump higher.
If you look closely at around $525.00, there was a daily gap higher, and then there was a retracement back down to about $520.00. That is a classic gap-fill.
Notice that once the gap filled, the trend for SPY continued to be higher. We say that the gap is filled when another candle or wick fills in the price level that was missed by the gap higher or lower.
What Causes a Gap on a Stock Chart?
So, what causes a gap to be higher or lower on a chart? The most common reason is news or a catalyst that causes the stock price to rise or fall outside market hours. For this reason, many gaps tend to occur at the start of a new session. The news releases before or after the previous day’s session, and the stock will gap up or down to start the next day.
Gaps can also happen during intraday trading. As a result, this is a common trading strategy used by day traders. When a gap happens in the middle of a trading session, it likely means that news leaked during trading hours.
A long list of catalysts can cause a gap to occur on a chart. One great example is earnings calls. Companies will report their quarterly earnings reports four times yearly before or after the markets close. As you probably know, these reports can cause volatility for the stock. Gaps often open due to the aggressive price moves after an earnings call.
Other catalysts include a black swan event, geopolitical tensions, or a global disaster. A great example is the COVID-19 crash in March 2020. Something that impacted the entire world was out of our control as traders.
Different Types of Gaps on a Stock Chart
Traders can find four main types of gaps on a stock chart: common gaps, breakaway gaps, exhaustion gaps, and continuation gaps. Each type of gap occurs at different points in a stock’s trend. Let’s look at each type of gap on a stock’s chart.
1. Common Gaps
Traders can find four main types of gaps on a stock chart: common gaps, breakaway gaps, exhaustion gaps, and continuation gaps. Each type of gap occurs at different points in a stock’s trend. Let’s look at each type of gap on a stock chart.
As the name suggests, common gaps on a stock chart are frequent. Normal market forces cause these gaps and have little to do with the underlying stock.
Generally speaking, broader market fluctuations or index movements cause these gaps. They also tend to get filled rather quickly and are usually non-events.
2. Breakaway Gaps
Breakaway gaps are a signal that every trader wants to see. These tend to gap above or below support or resistance levels and can indicate that a new trend is starting. It is common to see a re-test of that previous support or resistance level to fill the breakaway gap. If the re-test of those levels holds, the new trend will likely continue.
3. Exhaustion Gaps
These gaps tend to come at the end of a stock’s trend, indicating one final push toward hitting a new high or low price. A signature of an exhaustion gap is a big move in the price accompanied by larger than normal volume. The larger volume level signifies exhaustion and an imminent conclusion to the current trend.
4. Continuation Gaps
A continuation gap, or runaway, occurs in the middle of a stock’s trend. These gaps tend to be caused by trader FOMO or the Fear Of Missing Out.
Large gaps higher or lower can indicate that late buyers or sellers are entering the trade in fear of missing out on a trend that isn’t likely to see any retracement. These tend to look like exhaustion gaps but do not see the same spike in volume.
Does every gap fit into one of these categories? Usually, but not always. As you probably know, the market is funny, and every session is unique. Weird things can happen on a stock’s chart that can cause an unexpected gap higher or lower at any time.
Do All Gaps Need to Be Filled?
Finally, we get to the question everyone wants to know: do all gaps need to be filled? The answer is going to be underwhelming: not always, but usually.
As with most things, gaps fill within reason. If there is a gap on a chart from ten years ago when the stock was trading 90% lower than it is now, it likely won’t fill. More often than not, these types of gaps were a runaway or breakaway gap. If it was a bullish gap higher, sometimes the stock never looks back.
It would help if you never used an un-filled gap as the primary price target for a stock. Sometimes, gaps can take months or even years to fill, and sometimes, they never fill at all.
It’s important to know what type of gap you are dealing with on a stock’s chart. Therefore, this can indicate when you might expect the gap to fill and the point of the stock’s current trend.
Why Do Gaps Fill on a Stock’s Chart?
So, if gaps fill most of the time, why is it such a common and dependable strategy? The basic premise of a gap is that there is a price area on the chart without any buyers or sellers. We can think of a gap as a moment when the stock’s price either jumped higher or lower from some catalyst.
Gaps are like magnets to the price because there is no support or resistance between the two prices on either side of the gap. When a stock falls or rises through a gap, it will naturally seek buyers’ support or sellers’ resistance.
Traders who learn to read gaps on a chart can often anticipate a re-test or retracement. Let’s also keep in mind that there is a major emphasis on gap fills among retail traders. Institutions or professional traders can identify gaps in a chart and use that to their advantage.
Final Thoughts: Fill the Gap
Although I debunked some widely believed myths about gap fills, they are an advantageous trading strategy. Often, gaps form on a chart due to over-exuberance. Sometimes it’s justified, and sometimes it isn’t.
Using gaps on a chart as a trading strategy is not using the whole picture. Gaps should be one weapon in your trading arsenal. Identifying the type of gap and where the stock is in its current trend is just as important as the gap itself.
As with any trading strategy, the stock market guarantees nothing. Most gaps will fill in the grand scheme of things, but remember that they don’t have to. Never use a gap as the only strategy for trading a stock!
Head to our trading community at BullishBears.com if you enjoyed this article!
Frequently Asked Questions
Gaps are large price movements on a stock's chart that show a gap higher or lower from the previous price. Filling the gap means retracing the gap to the previous price in the future.
There isn't a hard and fast rule about gaps filling for stocks. Most traders agree that gaps fill between 70-80% of the time. To be considered filled, at least the wick of a candle has to pass through the gap zone on the chart.
Yes, it certainly can be a profitable trading strategy. Most gaps will eventually fill. When implemented correctly, it's enough of an edge to be a profitable strategy. There is always the chance that a gap never fill, which would be a losing trade.
Ideally, you will want to wait for that gap to fill through a re-test or price retracement. Since most gaps fill, you can wait for this to happen before entering a trade. You will feel more assurance of the continuation or start of a new trend.
