HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
MultiBank Group information and reviews
MultiBank Group
84%

Price Gaps In Forex Trading: Types, Causes, And Strategies


Price gaps are a common phenomenon in forex trading, characterized by a significant difference between the closing and opening prices of an asset. These gaps can occur due to various factors, including changes in investor sentiment, market liquidity, and the release of important news. Understanding the types, causes, and implications of price gaps is crucial for traders looking to capitalize on these market opportunities and manage associated risks effectively.

What Is A Gap?

In the technical analysis, it can be identified only on the candlestick or bar chart, which fixes the size of the gap - the difference between the closing and opening prices. A gap in the flow of price quotes on the forex can be observed on the charts of various financial assets (currency pairs, stocks, commodities, etc.), during long breaks between trading sessions (mainly after the weekend).

Such tendency is connected with possible changes in investors' moods who sensitively react to any events able to influence changes in the supply/demand level for an asset. Significant new circumstances occur in the world arena according to their "schedule" and are not tied to the time of trading on the financial floors.

Significant intraday gaps are much rarer and can occur at the release of important news and in cases of serious economic, political, or natural disasters.

The Value Of Gaps

The gap, despite the high liquidity of this market, usually fluctuates in the range of 20-50 points (exceptions are force majeure when there were jumps of 100 points and more). These values should also be used as a guideline when developing a trading strategy, based on the use of gaps.

The following variants of gap values are considered:

What Causes Gaps

The occurrence of gaps is not due to manipulation of brokers (if in doubt, you can double-check the quotes at other brokers, so as not to fall victim to a fake gap) and depends on several factors of a market nature (exceptions are faults of technical nature).

Low Liquidity Of The Asset

The level of liquidity of financial assets plays a key role in the occurrence of the gap. There is a direct correlation - the lower liquidity, the more often you can meet the price gaps. This correlation is confirmed by the difference in the frequency of gaps at stock exchanges and forex (the stock market cannot compete with forex in terms of trading volume). The over-the-counter forex market shows colossal growth rates (daily turnover approaches $6 trillion).

Investors' activity can be explained by the high demand for currencies (first of all, the US dollar) which serve all financial operations on the global market (here we have trading transactions, hedging risks, investments in securities, and other operations).

Fundamental Factors

Data of fundamental analytics also contributes to the appearance of gaps on the charts. Here we should pay attention to the publication of the main macroeconomic indicators of the leading countries in the world economy - the United States, Germany, China, and Japan. If the news release contains information that is significantly different from the preliminary forecasts, the probability of the price gap increases.

For example, Non-Farm Payrolls data (one of the most important U.S. statistics) coming out on the first Friday of the month can seriously change the mood of traders. During the coming weekend, they might radically revise their strategies, by the opening of trading on Monday the unbalanced forex market will react with a gap.

Technical Problems

Technical problems are caused by incomplete quotes coming to the trading terminal. Such situations can arise from the broker, and through the fault of the trader, are most often a consequence of interruptions in Internet connectivity. Technical gaps in the forex market are rare and may show insignificant gaps.

How To Identify A Gap

The gap on the candlestick or bar chart can be easily visualized as a gap between neighboring price quotes (there are no special tools to identify gaps). If the price minimum at closing is higher than the maximum at the opening, then a "bearish gap" is observed. If the price maximum at closing is lower than the minimum at the opening, we are talking about the gap upwards - the "bullish gap".

Types Of Gaps With Examples 

Forex gaps are classified according to where they occur in the current market trend:

Common Gap

This type of gap is a rare "guest" in forex because it appears on the low-liquid markets without pronounced dynamics. In currency trading, it can sometimes be noticed on Mondays in the morning session, if something provoked a sharp interest in the asset. As a rule, the gaps do not exceed 10 points and are not of interest for position opening. If one wants to check oneself on an "out of the box" situation, then one can play for closing the gap (usually, a common gap will close within 12 hours).

Breakaway Gap 

Breakaway gaps occur in the final phases of the formation of some patterns (e.g., "symmetrical triangle", "head and shoulders"), breaking out key support/resistance levels, which together give a reliable signal of a powerful trend emergence. Beginning traders can use the program for the automatic search for patterns (autochartist).

Potential profit is achieved because such a gap is not closed, the price rushes in the direction of the breakout. At the bullish gap, it makes sense to place long positions, at the bearish gap - short ones.

Exhaustion Gap

The name tells about its characteristic features - it appears in the large fading trends, which can be explained by the loss of interest of traders in the trading asset. Due to such features, the emergence of a gap can be judged by the end of long-term trends and use two options for opening positions - either with a small profit target in the direction of the current trend or waiting for its completion and opening in the opposite direction.

With 100% certainty, it is impossible to judge a global reversal - a simple forex correction is not excluded.

Runaway Gap 

Runaway gaps are distinguished by the fact that they occur when there is a significant increase or decrease in interest in a financial instrument. Upward runaway gaps tell us that demand has grown strongly, and downward runaway gaps tell us that supply has grown strongly. Runaway gaps arise when market players are late with their decision to buy or sell, and rush to buy or sell, following the saying "better late than never". Thus, at the halfway point of the current trend, a section is formed where the trading volume increases significantly, and a gap is formed in the direction of the trend. This gap is the runaway gap, as it describes traders running or catching up, who in a panic are trying to take advantage of the current trend.

Runaway gaps are also called measuring gaps because they often divide the current trend in half.

What Is A Gap Closure And Why It Happens

The behavior of the price after the gap formation on the forex market depends on its type and size, from the point of view of technical analysis, as well as fundamental data affecting the current market situation. Not always the price "fills" the formed gap, and if the gap is closed, the process can be prolonged for an indefinite period.

The main "engine" for closing gaps are market makers, who want to make a profit, knocking out Stops of Friday's pending orders of the "crowd" (the gap opening market activates a large number of buy/sell orders with Stop Losses, close to closing prices).

Do Gaps Always Close?

Statistics show that gaps are closed by at least 70% (on the weekly gap), but not all assets "reach" such values. The currency pairs EUR/JPY, GBP/EUR, and GBP/JPY compensate for price gaps best of all. The most reliable gap for closing trade is the exhaustion gap. When making a forecast for gap closure it is necessary to compare the technical "chart picture" with the fundamental background - if there is a "divergence", it is best to refrain from active operations, and the general forecast should be placed on the "shoulders" of other instruments.

How Dangerous Gaps Are For A Trader

Gaps are dangerous in the following cases:

Random price gaps, which sometimes appear in low time frames, can also be confusing. To avoid making unreasonable decisions based on such signals, it is necessary to "synchronize the watches" - to check for extraordinary events of fundamental character, and add a couple of technical indicators to the chart.

The traders who trade short-term (small profit goals) are subject to the risk of price gaps. For this category, even a small price gap can cause losses.

Mid-term and long-term strategists are not so worried about "tricks" of the gaps, because the potential profit of such traders is estimated in hundreds and thousands of points, and the "tough" gap does not exceed the "bar" of a few tens of points.

Gap Trading Tips

To trade gaps in forex, the following key factors are taken into account:

You should pay special attention to the support and resistance levels. A breakout in either direction gives a strong trading signal.

Duplicate the truth of the signal will help:

Using Price Gaps In Trading Practice

You can use market and pending orders for activation of positions on gaps. Different variants of events are taken into account - the probability of closure, its size, and the period of occurrence (time frame). Let's consider a trade in time frame M30. If at the opening of the forex market the price gap is fixed (it is taken into account from 20 points), then for the first half an hour the price will move along the gap, yielding to the force of inertia.

At a "bullish" gap you can open a market order to buy, determining the level of Take Profit with additional analysis tools. A "bearish" gap is similarly used, with a sell order being activated.

If the gap up or down appears contrary to the current trend, the probability of the gap closure increases. In such situations pending orders (Buy Stop on an uptrend and Sell Limit on a downtrend) are effective.

The main problem is the difficulty of setting a Stop Loss. With Take Profit, you can vary - put it at Friday's closing level, a little bit higher, or at Friday's local peaks (max/min).

Conclusion

Price gaps in forex trading provide valuable insights into market dynamics and can offer profitable trading opportunities. Traders can analyze the type of gap, consider support and resistance levels, and utilize additional technical indicators and candlestick patterns to make informed trading decisions. While gaps are not always guaranteed to close, traders can enhance their strategies by aligning technical analysis with fundamental factors. It is important for traders to exercise caution, especially when trading with smaller deposits and during times of heightened market volatility, to mitigate the risks associated with price gaps.

#source


RELATED

ADX: Find the Strong Trend

In a wide variety of indicators that provide different signals, it's almost impossible to find the one that defines the trend's strength. It's vital to know whether the trend is stable or not, especially during...

FTSE 100 Predictions for 2021 and Beyond

Stock market returns in 2020 were eerily similar to what happened in 2009. We're seeing some strength emerging from a deep stock market recession. Even though...

Ascending Triangle Pattern in Trading

Investors tend to use different tools to define market direction - technical indicators, candlestick, and chart patterns are all key to successful trading. There is a wide...

CFD Trading Simplified: Strategies for the Modern Online Trader

What if you could trade the global markets with more flexibility than ever before? With CFD trading, you can! Contracts for Difference (CFDs) stand out as powerful instruments within the Forex markets, providing the possibility to capitalize...

Trading Chart Patterns: The how-to guide

One helpful skill for traders is learning how to trade chart patterns. But what is chart pattern analysis and how reliable is it? Let’s explore the most common patterns recognized...

How to Trade Shooting Star Pattern

One of the most popular and reliable methods of finding entry and exit signals is identifying candlestick and chart patterns. These patterns are a part of technical analysis...

Assessing the US 100 Index: Dead Cat Bounce or True Bullish Turnaround?

The US 100 stock index (cash) has garnered significant attention in recent trading sessions. Notably, this past Wednesday, the index showcased an upward momentum...

What Is the Risk/Reward Ratio and How to Use It

The risk/reward ratio tells you how much risk you are taking for how much potential reward. Good traders and investors choose their bets very carefully. They look for the highest potential upside...

Technical analysis: what separates the pros from the schmoes

In essence, technical analysis hinges on the study of past price movements and trends to predict future market developments. It first emerged as a tradition...

Everything To Know About a Crypto Bear Market

When you hear the term "bear market", it typically means that a market has dropped by over 20%. This harkens back to Wall Street, which uses the term bear market to describe when large amounts of losses have been realized...

The role of a technical analyst

Forex traders use technical analysis to forecast future price movements of financial assets based on historical market data. It involves analysing trends, patterns...

Basics of Options Trading: Understanding Put vs Call Option

A popular tool for speculation is options trading, where money can move fast, and traders can gain (or lose) their stakes quickly. But what are options contracts...

Best Trading Indicators: A Guide to the 17 Most Popular Technical Analysis Tools

In the intricate world of financial trading, one can easily get overwhelmed by the enormous amounts of data flooding the markets daily. Technical analysis offers a structured approach...

A Comprehensive Guide to Technical Analysis: Definition, Tools & Examples

Technical Analysis is a systematized approach employed by traders to predict price movements and trends by examining market data, primarily price and volume...

Beautiful Signals of the Butterfly Pattern

The butterfly pattern. It sounds nice, doesn't it? However, the real hides many difficulties for traders, especially for newbies. It's not a common trading tool...

Leverage and Margin in Forex

Leverage and margin are the terms each trader starts with. The concept is simple, so even a beginner trader will catch on fast. However, there are pitfalls that may affect traders...

Choosing a Trading Instrument: How to Trade Indices

By now, you must be familiar with the names of the world's major stock indices: Dow Jones, S&P 500, NASDAQ, DAX30. But did you know that they...

Newbies' Guide To Technical And Fundamental Analysis

The most important goal of every trader is to make a profit by investing in various assets and trading instruments. Successful investors make in-depth, extensive research...

Stop Loss In Trading: How To Say No

Almost all experienced traders of the forex market agree that it is necessary to set stop losses in any style of trading. Beginners, newcomers to the market, often neglect this rule...

Stop Orders Demystified: A Comprehensive Examination

In the intricate tapestry of financial markets, an arsenal of tools and techniques awaits traders and investors. Among these, trading orders serve as the backbone of any robust trading strategy...

XM information and reviews
XM
82%
FP Markets information and reviews
FP Markets
81%
FXTM information and reviews
FXTM
80%
AMarkets information and reviews
AMarkets
79%
Octa information and reviews
Octa
79%
BlackBull information and reviews
BlackBull
78%

© 2006-2024 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.