Lesson 15 of 31 · Zero to reading a chart

Stock Gaps Explained: Nobody Traded $11

A gap is the space between yesterday's close and today's open - nothing traded in it, it is the shape of a night of decisions, and it says nothing about what the day will do.

Yesterday this stock closed at ten dollars. This morning it opened at twelve. Nobody traded eleven. Where did eleven go?

Nowhere. It never happened. And that empty space has a name, and a reason.

Last episode you learned the two numbers. Yesterday's close, and today's open.

Usually they are close together. Sometimes they are not.

Think about what happens after four in the afternoon. The market shuts. But people do not stop deciding.

Overnight there is news. The company reports its results, or something happens in the world. Everybody who reads it forms an opinion. And none of them can act until nine thirty.

So at nine thirty, all of those decisions arrive at the same second. And the first price of the day lands wherever those decisions put it. Which can be a long way from where yesterday finished.

The empty space between the two is called a gap. Nothing traded inside it. It is not an error on the chart. It is the shape of a night.

Here is one. Yesterday's close, this line. Today's open, up here. The shaded part is the gap. No trade happened anywhere in it.

It works the other way too. Same picture, upside down. Closed here, opened down there. Nothing in between.

And on the minute chart, you can see it from inside the day. The nine thirty bar is here. Yesterday's close is that line, way down below. The stock never travelled between them. It arrived.

A gap is the distance between where yesterday finished and where today started. With no trading in the middle.

Here is the mistake. People see a stock open far above yesterday.

They assume the move is under way. That it will carry on in that direction.

Here are two real days. Both opened far above yesterday's close. At nine thirty, they look the same.

Sometimes the price keeps going. Sometimes it comes back down and closes the space it left. Both happen.

The gap tells you a night happened. It does not tell you what the day will do.

Open any daily chart and count the gaps. Each one is a night when something happened.

Check yourself

What is a gap?

The space between yesterday's close and today's open.

How many trades happened inside it?

None. Nothing traded there.

What usually causes one?

News or events while the market was shut.

Next lesson: There is trading before 9:30. It's not the same thing..

For learning only. Not financial advice, not signals, not stock picks.