🎯 In 30 seconds: A gap is empty space on a chart where no trading happened. A breakout is a close beyond a level that held before. Both mark moments when the balance between buyers and sellers changed fast. This chapter shows how to measure gaps precisely, how to filter breakouts so fewer of them trap you, what a failed breakout looks like, and how measured moves are projected. None of it removes the risk of a sudden reversal.
Measuring a gap precisely
People use the word gap loosely. It helps to separate two kinds:
- Full gap up. Today’s low is above yesterday’s high. No price between them traded at all. A full gap down is today’s high below yesterday’s low.
- Partial gap (opening gap). Today opened above yesterday’s close, but at some point the session traded back into yesterday’s range.
A full gap is the stronger statement: for a whole session, nobody traded at yesterday’s prices. Measuring the gap in units of ATR shows whether it is large for that stock (see Volatility tools).
A gap is filled when price later trades back through the whole empty band. Write down whether you mean a touch of the far edge or a close beyond it, because the two give different counts.
The gap types, in context
The four classic labels describe where a gap sits in a trend:
- Common gap. Inside a range, on ordinary volume. These are frequent and usually filled.
- Breakaway gap. Out of a base or range, often on heavy volume and news. It starts a move.
- Runaway gap. In the middle of a strong trend, as late buyers rush in. Some traders treat it as a rough halfway mark.
- Exhaustion gap. Late in a long run, often on very heavy volume, followed by a stall and then a reversal.
An island reversal combines two gaps: a gap in one direction, a few sessions of trading, then a gap the other way. The trapped sessions sit alone on the chart. Everyone who bought inside the island is now below the price they paid with no trades in between.
A runaway gap and an exhaustion gap look the same the day they happen. Only the following sessions tell them apart, so treat the labels as questions, not answers.
Confirming a breakout with written rules
A breakout is simple to describe and hard to filter. The idea is always the same: decide in advance what counts, so you are not judging each one by how it feels. Common filters, each a trade-off:
| Filter | Rule example | What it helps | What it costs |
|---|---|---|---|
| Close filter | Close beyond the level, not just a wick | Ignores intraday pokes | Later entry |
| Distance filter | Close at least 1% or 0.5 ATR beyond the level | Ignores tiny breaks | Even later entry |
| Time filter | Two closes in a row beyond the level | Ignores one-day traps | Misses fast moves |
| Volume filter | Volume at least 1.5 times the 50-day average | Favors breaks with real demand | Some good breaks happen on normal volume |
| Base filter | The level was tested at least twice over several weeks | Favors levels that mattered | Fewer signals |
Worked example (hypothetical stock JKL). JKL has stalled at $80 four times in two months. Its ATR is $2.00. A rule of “close above $80 plus half an ATR, on volume 1.5 times average” requires a close above $81 with heavy volume. A day that trades to $81.40 but closes at $80.60 does not qualify, however exciting it looked at noon.
After a valid break, the old resistance should act as support. A retest back toward $80 that holds is a second chance to enter with a tighter stop. A close back below $80 says the break is in trouble.
Failed breakouts
A failed breakout, sometimes called a bull trap (or a bear trap on the downside), is a close beyond a level that does not hold. Price slips back inside the range within a few sessions.
Failures can move fast. Everyone who bought the break is losing money, and their stops cluster below the level and at the range low. As those stops fill they add selling, which is how a failed upside break can become a break of the range floor.
Practical rules many traders use:
- If price closes back inside the range within two or three sessions, the breakout trade is exited, small loss or not.
- The stop on a breakout trade sits either just inside the range (tight, hit often) or beyond the midpoint of the range (wider, hit less).
- A failed break in one direction is noted as a possible signal the other way, to be confirmed by its own rule.
Measured moves
Several targets in this guide rest on the same idea: a move tends to be followed by a similar move after a pause. Three common versions:
- Range projection. The height of a range or pattern, added to the breakout price.
- Pole projection. The length of the move before a flag or pennant, added to the breakout from the pause (see Continuation patterns).
- Leg projection. A swing from A to B, a pullback to C, and a projected second leg from C equal to A to B. Some people use percentage moves instead of dollar moves on long charts with a log scale.
These projections put a number on “where might this reasonably go”. They are not forecasts. Give the next support or resistance level more weight than the arithmetic.
Gaps, stops and real fills
A gap jumps over any stop that sits inside it. If you hold a stock with a stop at $47 and the stock opens at $43 after bad news, the stop becomes a market order and fills near $43, not $47. FINRA and the SEC’s Investor.gov both warn that stop orders do not guarantee a price.
Many traders put stops beyond the far edge of a breakaway gap, since filling it cancels the news behind it, and trade smaller ahead of earnings.
What to check before trusting a breakout
- Was the level tested more than once, so it actually mattered?
- Did price close beyond it by your written distance filter?
- Was volume clearly above average?
- Is the broader market moving the same way?
- Is there room before the next level for at least twice your risk?
- Where exactly will you admit the break failed, and is that stop placed before you enter?
- What makes a gap “full” instead of partial? Answer: A full gap up has today’s low above yesterday’s high, so no prices between them traded. A partial gap only opens above the prior close.
- Resistance is $50 and ATR is $1.20. What close does a half-ATR filter require for a breakout? Answer: A close above $50.60.
- What is an island reversal? Answer: A gap one way, a few sessions of trading, then a gap the other way, leaving those sessions isolated.
- Why can a failed breakout fall quickly? Answer: Breakout buyers are trapped with losses, and their stops below the level and the range low add selling as they are hit.
Sources
- Robert D. Edwards and John Magee, Technical Analysis of Stock Trends (first published 1948).
- Brock, Lakonishok and LeBaron (1992), “Simple Technical Trading Rules and the Stochastic Properties of Stock Returns,” Journal of Finance.
- Sullivan, Timmermann and White (1999), “Data-Snooping, Technical Trading Rule Performance, and the Bootstrap,” Journal of Finance.
- FINRA investor education and the SEC’s Investor.gov pages on stop and stop-limit orders.
- Moneydesks Technical Analysis tool: Chart events, ATR, Donchian channel and drawing tools.