What is a Gap Down? Definition, Formula, and Example
A gap down occurs when a stock opens materially below its prior closing price, leaving a price range with no traded volume on the chart, usually triggered by overnight news, earnings, or macro shocks.
What is a Gap Down?
A gap down is a discontinuity on a price chart where a security opens below the previous session's low (a full gap) or below the prior close but within the prior range (a partial gap), with no trades occurring in the skipped price zone. Gaps happen because the market's equilibrium price moved while the exchange was closed — an earnings miss, an FDA rejection, a guidance cut — and the opening auction clears at the new level. The size of the gap measures the overnight repricing: a stock that closes at $50 and opens at $46 has gapped down 8%.
How a Gap Down is Measured
The gap percentage is:
Gap % = (Open − Prior Close) / Prior Close × 100
Classification by size (for a typical large-cap):
- Partial gap down: open below prior close but above prior low
- Full gap down: open below prior session low
- Exhaustion gap: a gap after an extended decline, often marking capitulation
- Breakaway gap: a gap that starts a new trend down, usually on heavy volume
Screeners flag gaps above a threshold — 2% for large-caps, 4–5% for small-caps — because sub-1% gaps are noise.
Worked Example
On February 21, 2024, NVDA demonstrated the inverse — but for a textbook gap down, take META on February 3, 2022. Meta closed at $323.00 and, after reporting weak user growth and a $10 billion metaverse loss, opened at $237.76 — a gap of:
(237.76 − 323.00) / 323.00 = −26.4%
No trades occurred between $323 and $237.76. The stock never filled that gap for over a year; it functioned as a breakaway gap that started a 77% peak-to-trough decline. A trader holding 100 shares through the close lost $8,524 at the open with no chance to exit inside the gap zone — the defining risk of overnight positions.
When Traders Use It
- Gap-and-go short setups: A gap down on high relative volume with a failed first bounce is shorted with a stop above the opening range high.
- Gap-fill trades: Partial gaps into the prior day's range often fill; traders fade the open back toward the prior close when volume is thin.
- Overnight risk management: Swing traders cut position size ahead of earnings because stops cannot execute inside the gap — a stop at $310 on META filled near $237.
- Sentiment gauging: A cluster of gap-downs across a sector signals regime change, not idiosyncratic news.
Limitations and Common Misconceptions
- Gaps do not have to fill: "All gaps fill" is folklore. Breakaway gaps on structural news stay open for years.
- Stops do not protect you: A stop-loss triggers at the next available price after the gap, which is the open — slippage is the entire gap.
- Gap size is not edge: Large gaps overshoot and undershoot with roughly equal frequency; the follow-through depends on volume and catalyst quality, not the gap itself.
- Pre-market price is not the open: Thin pre-market quotes can exaggerate the true opening auction level.