What Is Common Gap?
A common gap refers to an area on a candlestick chart where the price of a security opens significantly higher or lower than its previous closing price, leaving a "gap" in the normal price action. These gaps are a concept within technical analysis, a discipline focused on analyzing past market data, primarily price and trading volume, to forecast future price movements. Common gaps typically occur within a trading range or sideways market trend and are generally considered less significant than other types of gaps. They often appear due to normal market fluctuations, minor news, or simply lower liquidity during off-hours, and tend to be "filled," meaning the price often returns to trade within the gapped area relatively quickly.
History and Origin
The observation of price gaps has been integral to chart-based market analysis since its early days. As markets became more structured and trading data more readily available through charts, analysts began to categorize different types of price discontinuities. Early pioneers in charting, particularly those influencing Japanese candlestick chart analysis, noted these sudden shifts. The emergence of market openings where prices could instantaneously jump or fall, driven by overnight news or shifts in supply and demand dynamics before regular trading hours, led to the recognition of these "gaps." Modern market structures, including pre-market and after-hours trading, continue to influence the formation of such gaps. The determination of opening prices in exchanges, such as through opening auctions, is a fundamental mechanism that can create these price discontinuities as orders are matched.5 The process of price discovery—how the market determines the fair value of an asset—is a continuous process that can be interrupted or accelerated by new information, leading to the formation of gaps.
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