Price Gaps Explained
Price gaps form when the market reopens at a level where no trades occurred. They’re not magic and they’re not indicators—they’re the direct result of liquidity disappearing and the market needing to jump to the next available price.
What Actually Causes a Price Gap
A price gap forms when buyers and sellers refuse to trade at the previous closing level. The market has no choice but to reopen where liquidity exists.
- overnight news
- sentiment shock
- liquidity evaporation
- massive imbalance
This ties directly into what drives volatility because gaps are volatility explosions that happen while markets are closed.
The Market’s Liquidity Problem
Gaps are simply liquidity voids. There were no resting orders at the old price level, so the market jumps to the nearest level where someone is actually willing to trade.
| Cause | Effect |
|---|---|
| Thin liquidity | Market jumps levels |
| Order book imbalance | Reopen far from prior close |
| Shock news | Violent adjustment at open |
Why Gaps Often Get Filled
Gaps get filled for one simple reason: the market hates inefficiency. A gap is unfinished business. Price tends to revisit the gap because:
- liquidity providers rebalance inventory
- order flow retests the abandoned zone
- imbalances reverse or correct
If you read Market Efficiency vs. Inefficiency, gaps are classic inefficiencies—markets try to correct them.
Not Every Gap Fills Immediately
Some gaps fill the same day. Others take weeks or months. A few never fill (rare). The timing depends on:
- the strength of the initial imbalance
- sentiment following the gap
- whether liquidity builds below or above the gap
Types of Gaps You’ll See
1. Breakaway Gap
Starts a new trend. Harder to fill early because imbalance is strong.
2. Continuation Gap
Happens mid-trend. Usually fills later but not immediately.
3. Exhaustion Gap
Signals the end of a move. These fill fast because imbalance collapses.
The Real Signal Behind a Gap
A gap is not a directional signal—it’s a measure of how badly the market was caught offside. It shows where liquidity dried up and where sentiment flipped hard.
Bottom Line
Price gaps happen because liquidity vanishes and the market must jump to the next valid price level. They fill because markets clean up inefficiency. If you understand gap structure, you understand how the market corrects imbalance.