Gap
A jump between one period’s close and the next period’s open with no trading in between.
Also called: gap up · gap down · price gap
Written by Javier Sánchez Ros
In plain language
Gaps form when significant information arrives while the market is closed. The next session simply opens at a new price.
They are the clearest demonstration that a stop loss is a trigger, not a guarantee. A stop inside the gap is filled at the open, potentially far from the stop price.
Gaps are common around earnings, economic releases and weekend news, and are far rarer in markets that trade continuously.
Worked through
The assumption every stop calculation makes
- What sizing assumes
- prices are continuous
- Previous close
- $95.40
- Next open
- $88.10
- Prices that traded between
- none
A stop works by catching price on its way past a level. A gap means price never went past the level — it was in one place at the close and another at the open, and nothing traded in between for any order to act on.
That is a break in the assumption underneath every position size calculation, not a bad fill. The maximum loss was computed as size times stop distance, and stop distance turned out not to be the distance that applied.
Gaps are also not evenly distributed. They cluster around earnings, scheduled economic releases, weekends, and anything that develops while a market is shut — which is knowable in advance, and which is why checking the earnings calendar before holding overnight is a risk control rather than research.
The only instrument that still works across a gap is position size. Intraday, where a stop can genuinely be relied on, a larger position is defensible; held overnight, the honest question is what a 10% gap would do, and the answer has to be survivable.
Why it matters
Gap risk is the main reason held-overnight positions deserve smaller size than intraday ones. Your calculated maximum risk assumes continuous prices, and a gap breaks that assumption.
Common mistakes
- Holding a full-size position through a scheduled earnings report with a tight stop.
- Assuming every gap fills, and sizing a trade on that assumption.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The difference between the price you expected and the price you actually got.
A predefined exit that closes a losing trade before the loss becomes serious.
A company’s scheduled quarterly disclosure of financial results.
An automatic trading pause triggered by an extreme price move.
Trading sessions before the open and after the close, with far less liquidity.