In Forex trading, the phenomenon termed “the price gap” is a fairly simple concept. It refers to the empty zone that emerges when a candlestick chart’s opening price and the closing price of the prior candlestick are not the same. Those empty zones are termed the “price gaps.”
Such zones don’t form in stock trading often, but in Forex trading, they are more of a regular phenomenon. It’s because the Forex market remains closed for all the retail traders, whereas different International Banks can keep their operations running. This article will inform you all about the price gaps and how they can be a great trading opportunity for traders.
Price Gap Basics for the Forex Traders
As mentioned, the Forex market runs Interbank trades seven days a week while giving retail traders five days a week to trade. It creates a gap between the closing and opening prices of two successive candlesticks. Usually, they are the closing price of Friday and the opening price of Sunday.
Stimulators of Price Gaps
The price moves either up or down during this time, and the chart creates a pattern to show the gap. Price gaps can also occur during short timeframes, especially after a critical global news announcement. Various technical and fundamental factors that drive the course of the Forex market are also the stimulators for these price gaps. It often happens that sudden breaking news has turned the market upside down. Therefore, the difference between ask and bid rate extends and leaves the gap between them.
The professional traders in the options market are very cautious about these gaps. They intend to trade when the price gap is minimum as it reduces the risk factors significantly.
Price Gaps as Market Indicators
Price gaps can be a good indicator when it comes to Forex trading. Because they can depict the sentiment of the market better than many other analyses. For instance, gapping up most of the time reflects the reluctance of the traders to sell at that level. On the contrary, gapping down talks about the falling interests of the buyers at that level.
Apart from this, the tiny blank area between two successive bars says that the fluctuation could be an exploitable opportunity for the investors. This strategy even has a name, “Trading with Gaps.”
This strategy is easy, profitable, and reliable. However, some investors narrate to them the opposite war. They say these conditions are highly risky to deal with as they cause slippage. Let’s know a little better about this contradictory phenomenon.
Types of Price Gaps
Here are the four types of Price gaps that one could face in the Forex market
- The Breakaway: This one emerges at the end of a pattern where a new trend is about to start. It means that the market normally breaks out of its norm and to a prolonged phase. In this spot, the market begins to move up or fall down, leaving a blank space. The movement gets triggered often by a breaking news release or major events.
- The Runway: These blank spaces create within a continuous trend marking a continuing trend. They are considered profitable and secured to trade. One can merge runway gaps with different other analysis instruments to have more safe indications.
- The Exhaustions: These are more common in stock markets. However, they also occur in the currency exchange market. The end of a trend where a swing is about to peep out is the best place for an exhaustion gap to occur. This means investors should take note that a new trend is impending.
- The Commons: This is the best type of price gap that a speculator can consider for trading. Because it is the safest and the most profitable one. It shows up in the middle of Sunday and Monday and gives short-term traders a great trading opportunity.
Like all the other Forex market situations, Price gaps need to be treated with caution. Before you engage with them, make sure you have learned them well and practice them with demo accounts several times. It will lessen the extra loss.