What do price gaps in forex result from? What is their nature? Why do gaps appear in the market? Is there a strategy to trade the price gaps?
A gap on a chart is the zone where the price of an instrument moves sharply up or down and there is no trading in between. That is the situation when there is a substantial difference between the close price of the previous bar and the next bar’s open. On the chart, the gap looks like an “interval” between the adjacent movements of the price, which means that there has been no trading for this instrument during this period of time. So, a gap, in fact, is no price. It can be either up or down.
That is how it looks on the price chart:
Let’s take a simple example from everyday life. Imagine, you go to the currency exchanger and want to buy 1 euro for $1.14. That was the exchange rate a minute ago. But suddenly, the exchanger changes the rate, so you can now sell the euro for $1.24 per unit and buy it for $1.28. That is, there have been no intermediate price values between 1.14 and 1.24. That is how it happens in the market – there is a price gap. The reason is in that the buyers have changed the attitude to the value of a certain currency. It means that the close price is no longer relevant and isn’t interesting for anyone. That is why a new price opens.
Gaps are usually filled; it means the price moves back to the initial, preceding the gap, level, so the spread disappears due to the market countermove.
Types of gaps:
a) Common gaps. They are usually filled very quickly, within a few hours or days, and cannot be placed in a price pattern.
b) Breakaway gaps. They are not filled for weeks, months or even years. They occur near the end of a price pattern and signal the beginning of a new trend.
c) Continuation gaps. They occur in the middle of a price pattern. They can be partially filled, but the prevailing direction should continue in future.
d) Exhaustion gaps. They occur near the end of a price pattern; the chart fills the gap, and a new trend starts.
Gaps and trigger
What can trigger the appearance of a gap (sometimes gaps) on the exchange? Publication of the unexpected news is a real trigger, driving the market faster. If the news is predictable, the market doesn’t usually explode up or down. But, if the news is surprising, there is likely to be a gap. A gap can occur in the area, where there are a lot of buy or sell orders opened. When the level is reached, the market may just “slip”.
Gap and the market rule of thumb
There is just a single law that always works on the exchange – the Black-Sholes formula. It is really simple: the price can move the equal distance both upwards and downwards during one unit of time. Simply put, the chart can both surge and drop by one unit during a certain interval of time.
Gaps in the stock market
On this chart of Facebook stocks, you see a gap down; it is marked with the red arrow. The gap upside is marked with the green arrow
Apparently, the price gaps most often occur in the stock market. Shares are basically less speculative than exchange rates or commodities, though it seems surprising for many traders. Securities are bought and sold, added to majority stakes, companies get new owners. During the time of reports releases, these securities can instantly jump up or down in price. In the stock market, gaps often occur at the opening of a trading session.
Gaps in the commodity market
There is a gap in the oil market, marked with the red arrow. It must be noted that gaps are relatively rare in the fuel markets because this is a liquid instrument.
Relatively liquid are thought to be crops – soybeans, corn, wheat. But there can be rather wide gaps for these instruments.
Gaps in Forex
In the foreign exchange market, price gaps are relatively rare for freely convertible currencies. But the third-category currencies feature price gaps rather often. In Forex, gaps usually occur on Monday, at the beginning of a trading session. The volatility can also be increased by important news releases, scheduled central banks’ meetings, for example.
Traders are especially interested in the meetings of central banks of such regions as the EU, Japan, Canada, the USA, Switzerland, Australia and so on.
Gaps in the precious metals market
The price gaps are quite rare in the gold market, like in Forex.
The red arrow marks the gap on the gold price chart. If you trade gold, you should remember that gold is bought and sold for currencies there. If a certain currency moves sharply up or down in price, there can appear a gap on the gold chart. It is thought that the gold market features less price gaps less often than the silver one. However, price gaps are rather rare for the silver market as well.
Gap and trading stock indexes
Trading stock indexes, you can face gaps quite often. However, they are rarely so wide as for some certain, individual shares.
Gaps and euphoria
A price gap may cause a feeling of elation for a speculator. It happens when the price jumps in the desired direction. Brokers have a point that entitles them to cancel a deal if the price has changed by 10% or more. So, the elation is often unjustified. And the feeling of euphoria can soon be followed by panic.
Gaps and panic
If the gap is not in the needed side, the trader can feel frustrated, or even panic. If you trade currency pairs you shouldn’t be too worried about gaps. However, Forex has its drawbacks as well; it is rather hard to predict. At the beginning of a new bullish trend in the stock market, there can hardly be any gaps down. Diversification can somehow reduce possible losses, rather than completely secure the capital.
Gap and health
Can there be a danger for a trader’s health, if he/she faces a wide price gap? It turns out that there can. If a speculator bets all his/her money on the same instrument that is vulnerable to gaps, it can harm not only the welfare, but the health as well. So, traders are advised to trade small lots and diversify the risks. Then, temporary failures will be followed by temporary success, but the total account will be increasing. It is a simple tip, but, unfortunately, not many traders follow it.
Gaps and indifference
Can a trader ignore gaps? If he/she has put an order and faces a gap, then they can’t. But if you trade mini lots you may hardly notice the price gaps.
If a speculator is completely indifferent to gaps, then he/she doesn’t have any interest in the market or just isn’t trading.
Will a stop loss always protect you from price gaps?
A stop loss doesn’t protect from gaps. You will automatically get a loss if the price jumps not in your favour. It will be good if the jump isn’t so big.
Gap and Elliott Wave Theory
Can you count that the Elliott theory will suggest where a gap may appear? The theory in most cases indicates the direction of the price trend. So, it is not surprising that it won’t always be helpful in terms of price gaps.
Gap and deal cancellation
If the price jumps by 10% or more, a broker, according to the contract, has the right (but is not obliged) to cancel the gap. You shouldn't think such jumps are very often. But, still, they occasionally occur. By the way, the price can sharply move by 10% and more not only because of the gap, but just due to a strong price growth or fall.
Price gap and a losing streak
There is hardly anything worse than to face a gap against you at a difficult time. When a trader is suffering from failures and faces a gap, he/she can really have a nervous breakdown. Speculators need really strong nerves. If you don’t have a great deal of nerves, you’d better develop an automated trading system and have your robot, doing the job for you.
Price gaps and lucky chances
A gap in the needed direction can also do some harm. If you trade the system of safe pyramiding, it will be good for you if the price is gradually going in the needed direction, without any sharp swings. If the price can jump up, then it can well jump down. The liquidity of the market is the most important thing for speculators, applying pyramiding.
Gap and big trade volume
If you have entered with a huge trade volume and you face a gap you’re likely to have either great losses or great profits. Both things are not good. Good luck may cause you to feel too excited and lose the balance, which will badly affect your performance finally.
Gap and small trading volume
Little trading volume is also bad, if it is too little. Yes, a gap will cause minimum losses if you trade a very little lot. But such trading may be pointless if you trade, for example, a lot of 0.01 with the capitalization of $10,000. Your trade volume should be appropriate – neither too big nor too little. How to choose it? That is already a skill!
Gap: educated and illiterate
Traders respond to price gaps differently. Experienced speculator,s who know a lot, as a rule, adequately respond to gaps. Inexperienced traders can be too excited or too upset. Beginners are often confused, looking at the charts and being afraid to do anything.
Get rich on gaps
Do you want to become rich by means of gaps? When the price moves sharply in the desired direction, you’d better exit the trade with a profit and not enter any new ones. Doesn’t it make sense to follow the chart? There is no single answer to this question. Sometimes, it should yield a profit, sometimes it will be pointless. Most advanced traders exit such a trade and stay away.
Efficient strategies to trade gaps
Do you want to gain by means of gaps? It is noted that the price gaps are usually filled. For example, if the EUR/USD pair closed at 1.1550 and opened at 1.1600, the price is likely to move back to the pre-gap level, 1.1550. It doesn’t always happen, but it so in most cases. In about 4 cases out of 5, everything goes on according to the above scenario. Many speculators exploit it. They trade in such cases with big lots, very big lots. It stands to reason, it is always very dangerous to trade a very big lot. Yes, the gap can be filled; but it may not happen at once, or the price may go in the opposite direction. You may not just have sufficient funds to live through the time of losses.
You can generate income, looking for distressed assets. When such an instrument opens with a gap someday, you should quickly exit the trade. It is important not to miss the chance. Advanced traders can do it, newbies – can’t.
Trading laws and gaps
Trader’s economic education and gaps. What is the relation between them?
Will a Degree in Economics help a trader identify a gap in advance? It obviously won’t. A trader may be assisted by personal experience and intuition to predict gaps. In addition, there are no such traders who always avoid gaps or always use them to their advantage.
Indicators and gaps
Multiple indicators and oscillators may somehow discourage you, or, they may provide a really good tip. There are indicators that quite accurately signal the market being overbought or oversold. At this point, you must be prepared for a price gap.
Live till Monday, or a tale about huge lot
How much can you afford to lose when entering trades during a gap? In exchange trading it is not suggested to lose more than 1% of the deposit per trade. Some traders may increase the limit up to 3%, or even 5%. Of course, you should be aiming at minimum losses, resulted from a gap. To do it, you need to trade the gaps with tiny lots. Unfortunately, not everybody succeeds.
If you play a huge lot when there is the price gap, you can lose all your funds.
Give Up on Charts!
It is hard to believe, but there are few traders, who don’t use any charts at all when trading. These speculators are assisted by their secretaries. They abandoned technical analysis because of their psychological features. How do they treat gaps? They learn about gaps from their assistants. Such traders have a broader view on the market than most technical speculators. They see gaps just like a temporary success or trouble.
False information about gaps
Some dealing centers get really crazy about gaps. If you go in for an educational course in a dealing center, you are likely to listen to a lecture about price gaps. Remember, that gaps are rather random. It is hard to anticipate their appearance. If someone tries to convince you in some clear regularity, it is a reason to doubt if it is the truth.
Gaps and news
Price gaps often occur on Mondays when trading session opens. Of course, the main factor, resulting in gaps, is the news releases. However, gaps may also appear not because of the news releases. For example, gaps can appear when some speculator buy a big volume of stocks. This stock must be of low capitalization, and the buyer is to purchase a huge volume of such stocks. Though, stocks with high capitalization may also feature price gaps.
Averaging with gaps
Is there any point in averaging during price gaps. Many speculators like to average when there is a price gap on the chart. Any averaging is always an additional risk. When a stock price is falling in the bullish market, averaging is relatively safe. Here, the word “relatively” must be emphasized. If you are going short in the bullish market, and the price jumps up, but you average, you’re going to face extremely high risks. A stock can be rising in price year by year. In forex, a counter move is always more likely. But there are periods, for example, during Brexit, when the price starts with a gap and is moving in the opposite direction for months, or even for years. In the commodity market, averaging is also rather dangerous during the gap.
Chart patterns and gaps
Is a gap more likely to occur, when there is a certain chart pattern? Analysts believe so. For example, if you discover an Inverse Head and Shoulders pattern in the bullish stock market, it is quite likely to work out. Though, the price might also jump up. Traders can anticipate the trend not only according to Head and Shoulders and Inverse Head and Shoulders, but according to some other patterns, like triangle, a pennant, a rectangle
Gaps and trading exotic currency pairs
Which currency pair is more likely to feature the price gap: euro to usd, or usd to Zimbabwean dollar? Of course, the Zimbabwean dollar is far less liquid than the euro, so, it is more likely to feature gaps. But the Zimbabwean dollar is not traded on the exchange, unlike the peso, the lira, the krone, or the rand, which are commonly traded. If you want to pick up the trend, then exotic currencies will give you an opportunity to gain, as these currencies often lose in value. And the devaluation often occurs with price gaps.
Gaps and expert advisors
There is a great number of Expert Advisors which trade the gaps. They are almost always programmed to the market counter moves – that is the price rollbacks in the opposite direction, following the gap. The robots can look for gaps independently and instantly respond to them. The robot’s disadvantage is that it doesn’t know how to respond when the market quickly gains back the positions lost. The price is changing very fast; an Expert Advisor opens a buy or a sell trade, but the price may change instantly. Anyway, it is not surprising that the robot doesn’t know anything. A robot can’t know anything; it just responds to the price moves.
When there is a very big gap in the market, you’d better not respond in any way. That is how most traders think. Huge gaps are quite often in the stock market.
Weekends, days off and gaps
Life doesn’t stop on days off. Different events happen in the world every day. Do weekends really matter if there is an earthquake or a tsunami? What if there is another natural disaster? Politicians also present speeches on weekends. Even Donald Trump likes surprising the world by his comments on weekends. Therefore, the market on Monday morning is completely different from that it was on Friday evening. That is why gaps are more likely to appear after the weekends and holidays.
Demo account and trading gaps
Is it possible to learn how to trade gaps on a demo account? Yes, it is. To do it, you need certain knowledge and some patience. But still, trading gaps on a demo and a real account is different. Something that used to be in the past has an indirect relation to the situation in future.
Discover a gap
Can you identify a gap during the price sharp surge or drop and enter the trade on time? It is impossible, and there is no point in dwelling upon it.
An entry with a big lot on Friday evening
Some traders enter the market with an incredible lot, for example 1:500 or 1:1000 to quickly increase their capitals. If they succeed, they’ll get a really high score; if they fail, they’re going to lose all their money. They believe it is worth risking. But you never know how a broker will treat such trades. Such a deal can be canceled according to the contract terms.
Short summary of key points
Making profits from gaps in the stock market:
Remember, price gaps are not always filled back in the stock market. A stock can be heading in one direction without any reversals during years, or even decades. And a trade is more likely to be canceled if the price moves by more 10%.
Making profits from gaps in forex:
Forex is the easiest to make profits from gaps, as gaps are highly likely to be filled there. But don’t be too excited, it doesn’t always happen.
Gaps in the commodity market:
Gaps are quite common in the commodity market and they are not always filled.
Gaps in the precious metals market
In the gold or silver market gaps are often filled, but a little less often than in forex.
Do gaps tend to be filled? Yes, they do! In most cases, price gaps are filled and the price moves back. As a rule, gaps appear in the stock market, they are less common in the commodity market and even less often in forex. It is possible to make profits from price gaps, but this trading strategy shouldn’t be the only one you apply.
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