Gap types as trade hypotheses

Classify the opening first

An opening upgap is a session that opens above the prior session high. An opening downgap is a session that opens below the prior session low. Either case leaves a price area with no trades.

Editorial reading: treat the opening as a classified market condition before it becomes an order. Gap analysis asks what kind of hole appeared. Gap trading then attaches entry, exit, and abstention rules. A stop-loss order bounds the loss if that class is wrong. The same price hole is not handled the same way in a range, a breakout, a trend continuation, or a late-trend climax.

Four conditions, four hypotheses

Common gaps appear often inside trading ranges. They are usually narrow, generally fill as prices later trade through the hole, and rarely mark a major regime shift.

A relatively wide gap is often treated as an overreaction or an after-hours liquidity artifact. Some traders fade it by selling an upgap on the open in anticipation of a fill or a calmer session.

A breakaway gap leaves a congestion range on rising volume and volatility and then functions as support or resistance. In the historical workflow, that vacated edge was treated as a durable level for placing a stop-loss order.

Runaway gaps appear mid-trend as consecutive spikes when late participants pay up after a failed or one-day pullback. They may later fill within a few weeks even while prices keep making new highs or lows in the short term.

An exhaustion gap is a wide, high-volume opening hole near the end of a strong trend. It is typically not followed by new highs or lows, often fades within a few days, and was used as a reversal setup when the session also failed to follow through.

Attach the procedure after the class

Editorial reading: classification is not the trade. After gap analysis names the condition, gap trading is a separate procedure with its own entry, exit, and abstention rules, and a stop-loss order is sized to that hypothesis rather than to the mere fact that a hole exists.

A narrow common gap inside a range, a breakaway from congestion, a runaway continuation, and a late-trend exhaustion gap therefore imply different follow-through tests. The historical workflow used the breakaway edge as a durable bound for the stop-loss order, while still leaving the overnight-jump problem in place: a resting stop can be passed at the next open, and the loss can exceed the planned stop distance.

Test the rules in the market that produced them

Gap frequency and usefulness are market-specific. Some markets gap often enough that the event is routine and less informative. Others almost never gap. Rules should be tested per market rather than assumed to transfer.