A Gap is formed when the closing price of previous days and the opening price of next day have different price level.
Four types of gap are: Area gap, break out gap, run away gap and exhaustion gap. Area gap is also known as common gap and usually it does not give any opportunity to decide. Other gaps give an indication to entry or exit based the nature of gap and following trend.
Common gaps usually should be traded in the opposite direction, as the market fills the gap after they occur.
Continuation gaps like break out or run away gap signal a strong trend, and traders can enter in the direction of the trend after a continuation gap occurs.
Exhaustion gaps signal trend reversals and traders should look to enter the opposite trend after they spot this gap.
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