What it is

A gap is a price discontinuity: the new session opens at a level meaningfully away from the previous session's close, leaving a blank space on the candlestick chart where no trading occurred. Gaps happen because markets are closed for hours but information is not. Earnings, news, and overnight moves in related markets all accumulate while you cannot trade, and the order book reprices instantly at the open to reflect everything that changed.

The opening range is the high-to-low band carved out in the first defined slice of the session - commonly the first 5, 15, or 30 minutes. It is where the overnight imbalance between buyers and sellers gets resolved in real, tradable prices. Together, gap type and opening range tell you a great deal about who is in control before you ever place a trade, which is why they are a staple of intraday work.

How it works

Not all gaps mean the same thing. The classic taxonomy sorts them by context:

• Common gap. A small gap inside an existing range, with no special news. It carries little information and tends to fill - price drifts back to the prior close - fairly often. Low signal.
• Breakaway gap. A gap that launches price out of a consolidation or support/resistance zone, usually on heavy volume and real news. It signals the start of a new move and typically does not fill soon. High signal.
• Runaway (continuation) gap. A gap within an established trend, mid-move, confirming momentum rather than starting it. Often appears roughly midway through a sustained run.
• Exhaustion gap. A gap late in an extended trend, often on a climactic surge of volume, that marks the move running out of fuel. It frequently fills as the trend reverses. High signal, but the opposite direction to a breakaway.

The single most useful discriminator is volume and location. A gap on heavy volume out of a base is information; a gap on light volume inside a range is mostly noise. Whether and how fast a gap fills is itself a clue: a quick fill suggests the gap was an overreaction; a gap that holds and extends suggests genuine repricing.

The opening range forms as the market digests the gap. In the first minutes, buyers and sellers fight to a high and a low. Once that range is established, its boundaries become reference levels: a break and hold above the opening-range high suggests buyers won the auction; a break below the low suggests sellers did.

How to use it

Two broad playbooks sit on top of gaps and the opening range, and the whole art is choosing between them:

1. Fade the gap (bet it fills). Appropriate when the gap is common or exhaustion in character - small, news-light, or climactic at the end of a long trend, especially against a strong prior level. You enter expecting price to retrace toward the prior close.
2. Follow the gap (bet it extends). Appropriate when the gap is a breakaway or runaway - out of a base or mid-trend, on heavy volume and real news. You enter expecting price to continue in the gap's direction.

The opening range gives you an objective trigger and an objective stop for either plan. A common opening-range breakout approach:

• Mark the high and low of the first 15 or 30 minutes.
• Wait. Do not trade inside the range; the first move is often a fake.
• Trade the confirmed break - a close beyond the range boundary, ideally with expanding volume.
• Place the stop on the opposite side of the range, so a failed breakout is cut quickly.

Worked example: A stock closed at 40.00 and gaps up to 41.50 on a strong earnings beat and heavy pre-market volume - a textbook breakaway. In the first 30 minutes it ranges 41.30 to 41.90. Rather than chasing the open, you wait; when price closes above 41.90 on rising volume, you go long with a stop just under 41.30 (the opening-range low). The breakaway character argues follow, not fade, and the opening range gives you a defined risk: about 0.6 of a point against an entry expecting continuation.

Strengths & limits

Gaps and the opening range are valuable because they compress a lot of overnight information into two readable signals: a discontinuity that tells you what changed, and a first-session range that tells you who is winning now. They give intraday traders objective levels for entries and stops instead of vague feel, and the fade-versus-follow decision forces you to classify before you act.

The limits demand respect. Gap classification is only obvious in hindsight - in the moment, a breakaway and an exhaustion gap can look identical until volume and follow-through resolve the ambiguity, so position size should reflect that uncertainty. The open is also the worst liquidity window: spreads are wide, the book is thin, and slippage is at its peak, so executing opening-range trades costs more than mid-session trades. And gaps can be traps - fading a breakaway because it 'looks extended' is a classic way to stand in front of a freight train. Wait for confirmation, size for the uncertainty, and respect that the first print is rarely the fair price.

Key takeaway: Gaps come in common, breakaway, runaway, and exhaustion flavours distinguished mainly by volume and location; the opening range frames who won the overnight auction; and the core decision is whether to fade the gap (bet it fills) or follow it (bet it extends), using a confirmed opening-range break for entry and the opposite side of the range for the stop.