Gapping is a phenomenon in the financial markets where a security’s price experiences a significant and sudden movement between the close of one trading session and the opening of the next. This movement creates a visual “gap” on a price chart, where no trading occurred at the prices within the range of the gap. Gaps are typically driven by unexpected or impactful news, earnings reports, economic data, or major events that influence investor sentiment outside of regular trading hours.

There are four main types of gaps:

1. Common Gap: This is the most frequent type of gap and often occurs in a relatively stable market without any significant news. Common gaps usually fill quickly as the price retraces to the level before the gap.
2. Breakaway Gap: This gap happens when the price breaks out of a consolidation area or a significant support or resistance level. It often signals the start of a strong trend in the direction of the gap. Breakaway gaps usually do not fill quickly, as they indicate a shift in market sentiment.
3. Runaway (or Continuation) Gap: This type of gap occurs during a strong trend, often in the middle of a price move. It represents a surge of enthusiasm in the direction of the trend, typically fueled by continued good news or increasing momentum. Runaway gaps tend to reinforce the existing trend and do not fill quickly.
4. Exhaustion Gap: An exhaustion gap appears near the end of a strong trend and signals that the trend may be nearing its conclusion. It is often accompanied by a sharp increase in trading volume and is followed by a price reversal. Exhaustion gaps tend to fill quickly as the market reverses direction.

Gaps can be either upward or downward:

• An upward gap occurs when a security opens at a price significantly higher than its previous closing price. This often reflects positive news or strong market sentiment, leading to a surge in buying interest.
• A downward gap occurs when a security opens at a price significantly lower than its previous closing price. This typically results from negative news or bearish sentiment, causing a wave of selling pressure.

Traders and investors pay close attention to gaps because they can provide valuable insights into market dynamics and potential future price movements. The significance of a gap often depends on the type of gap, the volume accompanying the gap, and the overall market context. For instance, a breakaway gap on high volume might signal the beginning of a powerful new trend, while an exhaustion gap might warn of an imminent reversal.