What it looks like
The new candle opens below the previous candle's low, leaving empty space between them. The gap runs from the previous low down to the new candle's high. Gaps are most common at the weekly open on gold and forex and the daily open on indices and shares.
What it means
Something changed while the market was closed or thin, and sellers at the open were willing to accept less than anyone traded at before. If price stays below the gap, that new, lower view is holding. If price climbs back and fills the gap, the open was an overreaction and the sellers may be trapped.
How to trade it
- 1
Mark the top and bottom of the gap: the previous low and the new candle's high.
- 2
Confirmation: price stays below the gap through the first few candles.
- 3
Entry: sell while price is still below the gap, ideally on a small bounce that fails below it.
- 4
Stop: above the previous candle's low, the point where the gap is filled. Example on gold: Friday low 4,030, Sunday open 4,018. Sell a bounce to 4,022 that fails, stop at 4,032, a 10 point risk.
- 5
Target: 2 times the stop (20 points, near 4,002) or the next support level.
The gap is filled: price trades back up to the previous candle's low.
Where it works best
On markets that truly gap, such as indices at the cash open and gold at the weekly reopen, after real news.
WickSpeak spots gap downs automatically and names them on the candle that made them. The note gives what the gap is, how to trade it and that a filled gap proves it wrong. In Playbook you can use it as a condition in a play, alone or alongside other patterns and indicators (any of the 146 patterns can be a condition), and backtest it on past candles with your own costs.
Common mistakes
- Selling the open without seeing whether the gap holds.
- Reading meaning into tiny gaps of a point or two.
- Placing the stop inside the gap instead of at the fill point.
Related patterns
Questions traders ask
Should you sell a gap down?
Only if the gap holds. A gap down that stays unfilled through the first few candles tends to keep going; one that fills straight away tends to fail.
What is a gap fill?
It is when price moves back to close the empty space left by a gap. For a gap down, that means trading back up to the previous candle's low.
Why are there gaps on Monday charts?
Markets like gold and forex close for the weekend. If news moves the price while they are shut, the first candle on Sunday or Monday opens away from Friday's close.
What proves a gap down wrong?
The gap filling. Once price is back to the previous low, the sellers who drove the gap have lost the ground they took.