Where do gaps in forex price come from? What is their nature? Why do they appear? How to work with them? Is there a trading strategy on gaps?
A gap on a chart is a gap in price. That is the occurrence of a situation in which there is a significant difference between the closing price of the previous bar and the opening price of the next. Visually, the gap looks like a “gap” between neighboring elements on the price chart, which indicates that no deals were made on this instrument in this period of time. That is, the gap, in fact, is the lack of price. It can be either up or down.
Let’s take a simpler example from life. For example, you went to a currency exchanger and wanted to buy 1 dollar for 60.2 rubles. Such a course was a minute ago. But suddenly the exchanger changed course and at 61.4 rubles per dollar, the exchanger is ready to buy your currency and sells at 62.8 rubles. That is, intermediate prices from 60.2 to 61.4 were absent. Exactly the same thing happens on the exchange – there is a gap in price. The reason is the change in buyers to the price of a given currency. So the closing price is no longer relevant and does not cause any interest. Therefore, a new price opens.
Gaps, as a rule, close or even say – they are overgrown. By these words, it should be understood that the price gap disappears due to the counter-move of the market.
- simple breaks. They close quickly – within a few hours or days.
- gap gaps. Weeks, months, and even years do not “overgrow”. The chart is starting a new trend.
- continuation gaps. Appear in the middle of the trend. May partially close.
- the chart closes the gap and forms a new trend.
Gaps and catalyst
What can serve as a catalyst for the appearance of gaps (sometimes gaps) on the exchange? The release of unexpected news is the real catalyst that accelerates the market. If the news is predictable, then, as a rule, the market does not jump up or down. But if the news is sudden, there is no gap to be avoided. A gap can also appear in the place where the mass of buy or sell orders is open. Upon reaching this level, the market can simply “slip through”.
Gap and the only formula on the exchange
There is only one working on the exchange – the only Black-Scholes formula. Its meaning is simple but understandable: the graph can go in any direction the same distance for one unit of time. Simply put: the graph can both fall and rise by one amount at a certain time.
Stock market gaps
On this stock chart, Facebook shows a gap down; it is marked with a red arrow. The green arrow marks the gap up.
Apparently, in the stock market price gaps are most common. Stocks are less speculative in nature than currencies and commodities, although this is surprising to many. Securities pass from hand to hand, control blocks of shares pass, companies have new owners. When reports are issued, securities can instantly skyrocket or fall in value. In the stock market, gaps often happen during the opening of a trading session.
Gaps in the commodity market
A gap has formed in the oil market, it is marked with a red arrow. It should be noted that on the hydrocarbon market, gaps are relatively rare because this product is liquid.
Grain markets – soybeans, corn, and wheat are also considered relatively liquid. But gaps there are more impressive.
In the foreign exchange market, gaps are relatively rare. If we are not talking about freely convertible currencies, but about the currencies of the third category, then the price gaps are quite popular there. In the foreign exchange market, gaps usually appear on Monday at the opening of a trading session. Important news can also excite the market – scheduled meetings of the Central Bank.
For traders in the economic calendar, meetings of the Central Banks of countries such as the EU, Japan, Canada, USA, Switzerland, NZ, Australia, etc. are interesting.
Gaps in the precious metals market
On the gold market, gaps are rare, as in Forex.
The red arrow marks the gap on the gold chart. When working in the market, one must remember that there the goods are sold for currency. And if this currency sharply strengthens or becomes cheaper, then a price gap may appear on the chart. It is believed that there are fewer gaps in the gold market than in the silver market. Although on the lunar metal charts you can rarely see gaps in price.
Gaps and Index Trading
Trading indices, you can see that gaps there are relatively frequent. True, they are rarely huge, like individual stocks.
Gap and euphoria
A price gap can cause a speculator to experience euphoria. This happens if the chart jumps in the desired direction. Brokers have a clause that states that the broker has the right to cancel the transaction if the price has changed by 10 percent or more. This means that often joy is unreasonable. And a fit of euphoria can turn into a fit of panic.