Why are gaps filled

I have been looking at charts for many different stocks recently and have noticed whenever a stock "gaps down or up", i.e. opens trade lower or higher than the previous day's closing price, almost 90% of the time the stock will fill the gap that has been created. Is there a specific reason for this?

Asked by dslwong in Technical Analysis 3 months ago

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EthanR answered 3 months ago …

One reason is that traders realize that after a gap up, the stock is very overbought, and so they will "fade the gap" by shorting the stock. Another reason is that people who are long the stock may choose to take profits while the getting is good. However, you may find as you do the research on it, that stocks will tend to continue in that original gap direction, after filling the gap. A gap is usually caused by significant positive or negative news, and that tends to bring in more buyers or sellers to continue the trend.

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spider348 answered one month ago …

A couple additional points about gaps.
If they happen at the open it could be a result
of stocks being over or under priced in accordance to a sharp
overnight futures move. So the price will revert back to a
reasonable level which can fill the gap.

Sometimes the stock price will be opened higher/lower
on anticipation of a public participation resulting from
overnight news like earnings. If it is too much of a gap,
it can backfill.

Also if a price gaps, then there is no recent print history
or volume 'in the gap', so traders know this and when
they need to target a price level (to 'run stops'
or 'rinse out' weak hands, etc) they know they
will get some volume (participation) at those levels
on the parameters of the gap , so they get filled
that way too.