Gap

Gaps form because price discovery happens continuously, even when the stock market is closed. News breaks overnight, earnings are released after hours, economic data drops at 8:30 AM — all of it gets processed in pre-market futures and pre-market stock trading, so by the time the 9:30 AM bell rings, the opening price has already shifted from where it last traded. The larger and more volume-backed the overnight catalyst, the larger the gap. Small gaps on no catalyst are often just noise; large gaps on significant news are meaningful directional signals.

There are four main gap types traders care about. Common gaps occur on light volume with no catalyst and almost always fill quickly. Breakaway gaps occur when price breaks out of a consolidation range on high volume — they signal the start of a new directional move and rarely fill quickly. Runaway (continuation) gaps happen mid-trend on strong volume, confirming the trend is accelerating. Exhaustion gaps appear at the end of an extended trend, often on climactic volume, and signal the move is overextended — these tend to fill rapidly. Identifying which type you're looking at determines whether you trade the gap as continuation or reversal.

For day traders, the gap level is one of the most important reference points of the session. The prior close, the gap midpoint, and the pre-market high often all function as support or resistance levels during the regular session. The "gap and go" strategy bets on gap continuation; the "gap fade" strategy bets the gap will partially or fully fill. Both can work — the key is the catalyst quality, relative volume, and how price behaves at VWAP in the first 15-30 minutes. A gap that holds above VWAP on the first test is a very different setup from one that immediately dips below VWAP at the open.