What it means
A gap is a price discontinuity — the open of one session is significantly above or below the prior close, leaving an empty zone on the chart. Three functional types: (1) Breakaway gap: starts a new trend, breaks from consolidation; (2) Runaway/measuring gap: mid-trend, marks the midpoint of the move; (3) Exhaustion gap: end of trend, often followed by reversal. Common gap (intraday noise) is the fourth type but has no predictive value.
Why it matters
Gaps mark moments of high information density — news, earnings, macro events. Identifying which TYPE of gap you're looking at matters more than the gap itself. Runaway gaps confirm trends; exhaustion gaps signal the trend is dying. Misreading the gap type is the most common gap-trading error.
How to use it
Breakaway: trade in the gap direction, target = prior consolidation range projected. Runaway: use as a midpoint reference, target = mirror the move that preceded it. Exhaustion: fade — gap usually closes within 5-15 sessions, often confirms a reversal. Volume is the type discriminator: heavy volume = breakaway or runaway; light volume = exhaustion.
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