Four Types of Gaps

Gap occurs because of three reasons: marketwide events (political event, terrorism attacks, commodity price shocks), sector specific event (interest rate / currency change impact) and company related event (change in management / acquisition / approval of product).

Four Types of Gaps

Higher volatility in stocks bring more gaps in price action. 

Study - location, size and volumes of the gap to capture the profitable trading opportunities

Common Gap / Trading Gap / Area Gap

• Uneventful Gap
• Usually get filled quickly
• Common occurrence in trading range scenario / congestion area
• Usually low trading volume on such gaps creation
• Not big in size
• Scalping Trades

Breakaway Gaps

• Breaking out from pattern / trading range / support / resistance levels
• Such gaps occurs at the beginning of a trend
• Higher volumes accompany such gaps
• Takes time - may be years - to fill such gaps
• Higher timeframes more reliable
• Big moves expected

Runaway Gaps / Measuring Gaps / Continuation gap

• Occurs in middle of trend
• Interest buildup in stock because of significant news 
• Panic based execution of trades by traders in order to avoid missing on the opportunity. 
• According to Bulkowski, runaway gaps occurs on 43% from the beginning of the trend and in a downtrend gap occurs at 57% distance

Exhaustion Gap

• Occurs at the end or near end of the major trend
• Huge price difference with extreme high volumes (exchange of hands)
• Usually represents reversals on the cards after this gap
• Usually quick in filling the gap because of trend reversal
• Higher chances of stock going in consolidation mode or reversal after this gap appearance

Points to remember

• Difference between runaway gap and exhaustion gap is in volumes. Both are supported with good volumes. However, extreme high volumes activity with immediate drying of interest combined with reversal candles is associated with exhaustion gap
• All gaps are filled. Common and Exhaustion gaps comparatively fill faster than runaway or breakaway gaps
• Though it is believed that all gaps are filled, but the time taken cannot be explicitly defined. There is a possibility that gaps are not filled for years or sometimes partially filled for quite longer period of time. 
• Illiquid stocks create many regular gaps by touching the circuits day after day. Avoid trading in such stocks because of lack of volumes
• 
• Corporate action (ex dividend / bonus) gaps does not indicate much because there is no change in demand supply ratio
• Breakaway and measuring gaps should be traded in the direction trend of the gap