Price gaps appear across stocks, indices, forex, and CFD markets. They occur when an asset opens at a different price from its previous close or jumps between levels without trading in between. Traders study these gaps to understand market sentiment, volatility shifts, and potential continuation or reversal.
This guide explores the price gap meaning, why gaps form, how to classify them, and what practical strategies CFD traders use to interpret and trade them.
Price Gap Meaning: What Price Gaps Are and Why They Happen
A price gap occurs when the market moves from one price level to another without transactions taking place between those levels. This creates a visible “empty space” on a chart.
There are three main ways a gap forms:
1. Opening Gaps
These occur when a market opens at a higher or lower level than the previous session’s close. They are common in stocks and indices, which observe scheduled trading hours.
2. Intraday Gaps
Less common in high-liquidity markets, but they can appear during fast news releases when price jumps instantly.
3. Market Structure Gaps
These happen during sharp momentum movements where a price moves quickly between levels with low trading volume.
Why Price Gaps Occur
Price gaps usually appear during periods of low liquidity, rapid information flow, or order imbalance. Common drivers include:
- Earnings announcements or economic releases
- Central bank decisions
- Weekend or holiday closures
- Geopolitical news
- Thin liquidity sessions such as overnight periods
Because price gaps reflect market sentiment and supply-demand imbalance, traders often study them when analysing momentum or volatility.
For traders seeking to strengthen their foundational knowledge, the ActivTrades Education Centre provides detailed guides on chart patterns, volatility, and market dynamics.
Types of Price Gaps: Common, Breakaway, Exhaustion And More
Price gaps are typically classified into several types. Although definitions vary across trading communities, the core categories remain similar.
1. Common Gaps
These are small gaps that appear during normal market noise and are not linked to major events. They often fill quickly and do not usually signal trend change.
2. Breakaway Gaps
These occur when a price breaks out of a consolidation area or pattern with strong momentum. Breakaway gaps typically show a clear shift in sentiment.
3. Continuation (Runaway) Gaps
These appear within an existing trend, suggesting strong participation from traders and institutions. They often indicate trend strength.
4. Exhaustion Gaps
These form near the end of a trend. Volume spikes and sentiment extremes can lead to sudden reversals after exhaustion gaps.
Understanding which type of gap you are observing helps you set expectations around whether a price may fill the gap or continue moving in the same direction.
Market Liquidity Gap: What They Indicate and How to Read Them
A market liquidity gap is different from a price gap. A liquidity gap refers to a region on the chart where very little trading volume occurred. Price moves quickly through these areas because there are not enough buy or sell orders to slow its movement.
How Liquidity Gaps Form
Liquidity gaps typically emerge during:
- Off-peak trading sessions
- Periods of economic uncertainty
- Times of extreme volatility
- Sudden increases in institutional activity
Why Liquidity Gaps Matter for CFD Traders
Liquidity gaps can:
- Increase the likelihood of slippage
- Lead to wider spreads
- Make stop orders fill at less favourable levels
- Cause quick moves both into and out of positions
Understanding liquidity gaps helps traders prepare for fast-moving conditions and manage order placement more safely. Those studying liquidity gap trading often pair it with volatility analysis to assess potential risk.
Price Gap Analysis: How to Identify and Assess Gap Set-Ups
Analysing price gaps involves more than identifying the empty area on the chart. Traders typically examine volume, trend context, and volatility conditions to gain a realistic view of what the gap means.
1. Volume Confirmation
Strong volume after a gap indicates conviction. Weak volume often suggests a short-term imbalance likely to retrace.
2. Trend Structure
Breakaway or continuation gaps tend to follow clean market structure. Exhaustion gaps often appear at the end of extended moves.
3. Volatility Conditions
High volatility increases the probability of larger opening gaps. A widening volatility range can signal that the gap might extend.
4. Gap-Fill Probability
Many traders examine how often a stock price gap fills within a chosen timeframe. While some assets fill gaps frequently, others trend strongly without revisiting the initial level.
Because each market behaves differently, gap-analysis tools should fit the asset and timeframe. Those trading forex pairs, for example, may prefer to review the ActivTrades Forex Market page for spreads, volatility characteristics, and trading hours.
How to Trade Price Gaps: Practical Strategies for CFD Traders
Price gap trading strategies vary based on the type of gap and market conditions. Below are methods commonly used by CFD traders.
1. Gap-Fill Strategy
This strategy assumes price will retrace to “fill” the gap. Traders often:
- Identify common or exhaustion gaps.
- Wait for price to show reversal confirmation.
- Use tight stop levels due to volatility risk.
Gap-fill set-ups rely on price behaviour rather than on guaranteed outcomes.
2. Breakaway Gap Continuation
When strong news or momentum causes a breakaway gap, some traders look for continuation entry points:
- A pullback towards the gap zone.
- A break above the initial gap high.
- Confirmed volume expansion.
These set-ups are often short-lived, so traders analyse volatility before entering.
3. Runaway Momentum Gaps
Momentum traders look for:
- An established trend.
- A mid-trend gap.
- High participation from market volume.
These gaps usually indicate trend strength, although they can accelerate risk.
4. Opening Range Gap Trading
Traders focus on the early session:
- Identify the gap relative to the previous day’s range.
- Assess whether the market holds or rejects the gap level.
- Use short timeframes for precision.
This method demands a strong understanding of intraday volatility.
Risks of Trading Price Gaps: Volatility, Slippage and Liquidity
Price gaps can offer clear chart signals, but they also come with meaningful risks. These include:
1. Volatility Spikes
Gaps often follow news and can lead to large, unpredictable moves.
2. Slippage
Stops and limits may execute at a different price if the market moves rapidly.
3. Wider Spreads
Illiquid conditions can cause spreads to widen, especially at market open.
4. False Signals
Not every gap signals trend continuation or reversal. Low-volume gaps, for example, may resolve quickly.
5. Liquidity Risks
Thin liquidity zones can cause swift moves through stop levels without intermediate price action.
Using strong risk controls such as stop placement, position sizing, and session analysis can help manage these risks.
Price Gap Trading FAQs
What Is a Price Gap?
A price gap occurs when a market trades at a price level without transacting at the levels in between. The result is a visible gap on the chart.
Do Price Gaps Always Fill?
No. Some gaps fill quickly, while breakaway and continuation gaps may never revisit the original level.
What Causes Liquidity Gaps?
Liquidity gaps form during periods of low trading volume or when order flow is thin, causing price to jump through levels quickly.
How Do Traders Analyse Gap Set-Ups?
They combine volume analysis, trend context, volatility, and gap type to assess potential scenarios.
Are Gaps More Common in Stocks or Forex?
Gaps are more common in stocks and indices due to fixed trading hours. Forex gaps tend to occur around weekend opens or major events.
Final Thoughts
Price gaps give traders insight into sentiment and activity levels. What's more, traders with strong risk controls and discipline, who explore price gaps as part of a broader analysis framework, can interpret market behaviour more effectively and react to fast-moving conditions with greater structure.
Whether studying gap-fill set-ups or momentum gaps, the objective is the same: to use price information responsibly and make decisions that reflect your trading plan and risk tolerance.
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