A $100 stock reports subpar earnings — almost immediately, shares fall 10% in after hours trading. The stock doesn’t recover by the open of the next day. Instead, they open at $90: they gapped down. This happens all the time, and a common theme in charting is the idea that stocks have a propensity for filling these gaps. In this case, filling the gap would be the stock trading back up from $90 through $100 during regular market hours.
So one more time: what is a gap? A gap is a difference in price between two periods of time, where trading did not occur between the two prices.
Real-Life Examples of Gaps in Apple’s Chart
Here are a few examples of some recent gap-ups and gap-downs in Apple (AAPL) .
This chart (which uses daily candles during regular hours) makes the gaps pretty obvious. If we were looking at a chart over the same time period that used a line rather than candlesticks, it wouldn’t be so obvious. Candlestick charts offer more data at a glance, and if you aren’t used to using them, it’s never a bad time to start. But that’s a topic for another day!
Notice that these gaps are annotated beginning at the wick or shadow of the candle, and not the close or open — because the shadow indicates a period where trading occurred, it’s important to include them in the calculation of both where the gap is, and where the gap is filled.
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Real-Life Examples of Gap Fills in Apple’s Chart
Using the same Apple chart from above, let’s annotate where those gaps were filled.
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Can Gaps go Unfilled?
Yes. And furthermore, there’s nothing that says gaps in a chart must be filled immediately. Sometimes they can take years to fill. However, it’s worth noting that roughly 9 out of 10 gaps get filled eventually. Rather than thinking of this trading method as a hard and fast rule, you should think of gaps in a chart like magnets. They can be resisted, but they provide an added “pull” to a stock’s price action. Not to mention, with the large number of traders watching for the completion of these patterns, it can become somewhat of a self-fulfilling prophecy (like many themes in technical analysis). Regardless of why these gaps often get filled, it’s worth adding this simple charting concept to your trading arsenal.