What is a gap in trading?
In one line: A gap is an empty space on a chart, where price opens well above or below where it last closed, with no trading in between.
A simple example
A stock closes Tuesday at $60. After the close, the company reports earnings. On Wednesday it opens at $64.
There were no trades between $60 and $64. On the chart, there's a blank space between Tuesday's candle and Wednesday's. That's a gap up. Opening lower than the last close is a gap down.
Why your stop can't block a gap
Say you bought at $60 with a stop loss at $58. Overnight, bad news hits, and the stock opens at $55.
Your stop doesn't fill at $58, because price never traded there. Once the market opens, the stop turns into a market order and fills near $55. You planned to risk $2 a share and lost about $5.
That's the main risk of holding overnight, and it's why many traders check the calendar before they do.
Where gaps happen
- Stocks: between one day's close and the next day's open, especially after earnings or big news.
- Forex: mostly over the weekend, between Friday's close and Sunday's open around 5 pm ET.
- Futures: around the daily break and the weekend.
Why it matters
Gaps change the math on your trade. If your stock often gaps big, the risk you write down may not be the risk you carry. In swing trading, many traders size down or close before earnings for exactly this reason.
Day trading avoids overnight gaps entirely, at the cost of more screen time.
A common mistake
Believing "every gap must fill." It's a popular saying that price always comes back to close the empty space. Sometimes it does. Sometimes it runs the other way for weeks. Treat it as a maybe, not a rule.
Before holding a trade overnight, ask: "If this opened at a much worse price tomorrow, could I accept that loss?" If not, trade smaller or don't hold.
More on placing stops in how to set a stop loss.
Questions
What causes gaps?
News that comes out while the market is closed, such as earnings, economic data or world events.
Does a guaranteed stop protect against gaps?
Some brokers offer guaranteed stops for a fee in some markets. A normal stop order does not guarantee your price.
Are gaps good or bad?
Neither. They're a fact of markets that you plan around with size and timing.
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