Gap up and gap down

A gap is a jump in price between one bar and the next where no trading happened in between. On a daily chart, a gap up means the stock opened above the previous day's close; a gap down means it opened below. On the chart this leaves a visible empty space between the two candles. Gaps happen because news keeps arriving after 15:30, while NSE is closed, and the next morning's opening price has to catch up with everything at once.

Why gaps happen

• Company news: quarterly results, orders, management changes, regulatory action. Results are often announced after market hours, so the reaction comes as a gap the next morning.
• Global markets: US and Asian markets trade while Indian markets are shut. A big move overnight shows up in NIFTY's opening price.
• Policy and economic data: RBI decisions, government announcements, inflation figures, or events abroad.
• Corporate actions: a dividend makes a stock open lower on the ex-date by roughly the dividend amount. This is a mechanical gap, not a sign of selling.

How the opening price is set on NSE

NSE runs a pre-open session before normal trading. Orders are collected from 09:00 and an equilibrium opening price is worked out from them in the following few minutes; normal trading starts at 09:15. That opening price is where buy and sell orders balance after the overnight news, which is why the open can be far from yesterday's close. For NIFTY, GIFT Nifty, which trades in GIFT City for much longer hours, gives an early hint of where the index may open:

Compare the GIFT Nifty price with NIFTY's last close. A large difference suggests the index may gap, but GIFT Nifty is a separate contract with its own expiry and pricing, so the actual opening often differs. The pre-market page collects this with global markets each morning.

Full gaps and partial gaps

Take a stock that closed yesterday at ₹800 with a day's range of ₹788 to ₹808.

A full gap is the stronger message: nobody who traded yesterday traded at today's opening price. Partial gaps are very common and often reverse quickly. Size also matters relative to the stock's normal movement: a 2% gap on a stock with an ATR of 1% is large; on a stock with a 4% ATR it is ordinary.

The four classic gap types

• Common gap: small, inside a trading range, no real news. Often filled within days.
• Breakaway gap: the price gaps out of a long range or past a key level, usually on news and heavy volume. These often do not fill for a long time, because they mark a real change.
• Runaway (continuation) gap: a gap in the middle of an established trend, showing buyers (or sellers) are still eager.
• Exhaustion gap: a gap at the end of a long move, often followed by a reversal within a few days. It is usually only recognisable afterwards.

Telling them apart in real time is difficult. Context helps: a gap out of a three-month range on four times normal volume after strong results looks like a breakaway; a gap after a 40% run-up on falling volume could be exhaustion.

Does every gap get filled?

A gap is filled when the price trades back to the previous close: for the ₹825 open above, a fall back to ₹800. "Gaps always fill" is a popular saying but not a rule. Many gaps fill within a day or two, especially small partial gaps; breakaway gaps on strong news may never fill. Selling every gap up because it "must fill" can be very costly on a results day. A gap that holds through the first hour of trading, on heavy volume, is less likely to fill quickly than one that starts slipping in the first few minutes.

Gaps on intraday and index charts

Gaps appear mostly on daily charts, but they also show up on intraday charts at the start of each session: the first 5-minute candle at 09:15 often opens away from the previous 15:25 candle. Indicators such as moving averages and RSI treat that jump like any other move, which can make the first readings of the day misleading. VWAP starts afresh each morning, which is one reason intraday traders like it after a gap: it shows where the average trade of the new session has happened, without yesterday's prices mixed in.

For NIFTY and BANKNIFTY, gaps also move option prices sharply at the open. If NIFTY closes at 25,000 and opens at 25,180, the 25,000 call jumps and the 25,000 put falls before anyone can trade, and the at-the-money strike shifts. Option sellers holding positions overnight carry this gap risk, which is part of why overnight option positions need more margin and more care than intraday ones.

A live stock to watch at the open

Here are the indicator readings for State Bank of India, including yesterday's pivot levels:

Before the open, compare where the stock might open with these levels. A gap up that opens above R1 and holds there is a stronger sign than one that opens just above the pivot and slips back. A gap down below S1 against a rising 50-day average may be a dip within an uptrend rather than the start of a fall.

How traders handle gaps

• Wait for the first 15 to 30 minutes. The opening minutes after 09:15 are the most volatile. Many traders let the first 15-minute candle form and then trade a break of its high or low.
• Gap and go: a gap up that holds above the opening price on strong volume can keep running. The gap up on volume scan lists these each evening.
• Gap fade: trading the gap back towards the previous close, mainly on small gaps without news.
• Stop placement: for a gap-and-go buy, often below the day's low or the previous high; for a fade, beyond the opening high or low.

Common mistakes

• Buying the open on a big gap up without a plan. Opening prices are often the high of the day on news-driven gaps.
• Assuming gaps fill. Strong news gaps can run for weeks.
• Forgetting stop losses can be gapped. An overnight stop at ₹790 on a stock that opens at ₹776 fills near ₹776, not ₹790.
• Misreading dividend gaps. An ex-dividend drop is not selling pressure.
• Holding leveraged positions through results. F&O and margin positions feel gaps the most.