Lessons › Market structure › Gaps up and gaps down
World 2 · Market structure · lesson 12 · level 2
Gaps up and gaps down
A gap is empty space on the chart where no trading happened, often because news arrived while the market was closed.
In one line
A gap is empty space on the chart where no trading happened. Can you spot one and tell which way it jumped?
Explained simply
Imagine a staircase with one step missing: you jump straight to the next step and touch nothing in between. A gap on a chart is that missing step, where price jumps and leaves empty space. It usually happens because news arrived while the market was closed.
The lesson
A gap up happens when a candle's low stays above the previous candle's high, leaving empty space; a gap down is the mirror image, with the high below the previous low. Gaps are common in stocks and futures because news arrives while the market is closed. Crypto trades around the clock, so its spot charts rarely gap, while forex can gap over the weekend. A candle that opens beyond the previous close but trades back into the previous range is not a true gap.
A worked example
Illustrative example: yesterday a stock traded between 96 and 100. After good news overnight, today's candle trades between 104 and 109 and closes at 107, so its low of 104 is above yesterday's high of 100. That leaves a gap up of 4 (104 minus 100), and from the close price would have to fall 7 (107 minus 100) to fill it. If today's high had been 93 instead, below yesterday's low of 96, it would be a gap down of 3 (96 minus 93).
The same idea at four levels
- Beginner. A gap is empty space between two candles where no trading happened.
- Foundation. A gap up means the new low is above the previous high; a gap down means the new high is below the previous low.
- Intermediate. An open beyond the previous close that trades back into the previous range is not a true gap, because the empty space was filled the same day.
- Advanced. Stocks and futures gap after news that arrives while the market is closed, forex can gap over the weekend, and 24/7 crypto spot charts almost never gap.
- Expert. Experts note a gap's size in ATR and the price that would fill it, and they plan for both a fill and a run instead of assuming either.
Mistakes to avoid
- Calling it a gap when the candle opened higher but traded back into the previous range.
- Expecting gaps on 24/7 crypto spot charts.
- Measuring a gap from the previous close instead of from the previous high or low.
Check yourself
What is a gap on a chart?
Empty space where no trading happened between two candles. Price jumped over those levels without trading there.
What is a gap up?
A candle whose low is above the previous candle's high. The empty space sits below the new candle.
What is a gap down?
A candle whose high is below the previous candle's low. The empty space sits above the new candle.
Why do stocks often gap?
News can arrive while the market is closed. The next open prices in the news all at once.
Why do 24/7 crypto spot charts rarely gap?
They never close, so price trades through every level. Without a closing bell there is no jump at the next open.
Goal of this lesson: Recognize true gaps on a chart and know why they appear.