The Importance of Understanding Market Gaps

EnclaveFX Ltd
Mar 07, 2023

What are Gaps?

Typically, gaps are marked by sharp breaks in price, in which trading occurs only when no trading is involved. They can occur up or down and are most commonly found during the weekend since the forex market only closes for the weekend. It is also possible for gaps to appear in a concise time frame, such as a one-minute chart or right after a significant announcement.

What are the possible reasons for a gap to occur?

  • Economic data are released, especially if they contain data that are not expected by the market, which can lead to some confusion.
  • Whenever a major news event occurs, including global information and/or unexpected information. Whenever trading resumes following a weekend or holiday, especially if major news is announced during that time period.

The importance of these institutions cannot be overstated.

The market gap can be an indicator of the mood of the market. If the gap is up, that would indicate that no traders were interested in selling at that level. If the gap were down, that would mean that there were no traders interested in buying at that level. In addition, it is important to be aware of the fact that it is possible to gap past a stop order and get filled at a price that is worse than the stop order when you gap past it.

Occasionally, gaps in the price action can result in what is known as corrective price action. This is when price movements reverse after the gap has been formed.

What is the best way to use them?

Generally, if there is a gap in the market, that is a signal for you to stay out of it. A gap can indicate strength in either the direction of the gap or it can "close" by bringing prices back to where the gap was at least a short distance from where the gap began in the first place. It may be wise to cancel a trade if there is a gap that occurs right before the entry of the trade.