In forex trading, gaps are an interesting phenomenon that can catch traders off guard or present unexpected opportunities. Whether it’s a gap that appears when the market reopens after the weekend, a sudden shift during high trading activity, or a noticeable jump as a new session begins, these price differences can tell a story. Understanding what these gaps might signify or simply knowing that they exist can be a valuable part of navigating the complexities of the forex market.
What is a Market Gap?
A market gap occurs when the price of a financial instrument opens at a significantly different level from its previous closing price, leaving a “gap” on the price chart. In other words, the market jumps from one price level to another without following any trend in between. Gaps can occur in any financial market, including Forex, Indices, Commodities and Crypto pairs but they are particularly noteworthy in the forex market due to its 24-hour nature and the influence of global events.
Types of Market Gaps and Their Reasons behind
There are several types of market gaps that traders may encounter:
Market Opening Hour:
Gapping in the forex market after the market break is when there’s a significant price move in a currency pair with little or no trading in between. The price reopens at a much lower or higher level than the previous day’s session.
High Volume:
A High Volume Gap occurs when a price gap in the market is accompanied by a significant surge in trading volume, indicating a strong market sentiment.
This type of gap is often seen as a reliable signal that a large number of participants are driving the price movement. Unlike other gaps, high-volume gaps are less likely to be filled quickly, as the strong momentum typically propels the market further in the direction of the gap.
Additionally, High-volume gaps frequently occur during news events. When significant news hits the market, it leads to a sharp jump in price alongside increased trading volume. This combination of heightened trading activity and price volatility creates high volume gaps, as the market rapidly adjusts to the new information.
Weekend Gaps:
In the forex market, a forex weekend gap refers to a sudden price change on the chart, where there is an unusually large space between two candlestick prices. The continuous operation during the week halts over the weekend, often leading to a difference between the closing price on Friday and the opening price on Monday. This phenomenon is known as the weekend gap.
Why are these Gaps created?
Market Opening Hours, High Volume, and Weekend Gaps occur for several reasons but all reflect sudden price changes in the market. Market opening gap and weekend gap are normally caused by various factors, such as news events, economic data releases, geopolitical developments, or due to shifts in sentiment or events that occur while the market is closed.
High volume gaps are caused by a surge in trading volume, usually following major news announcements.
For example, EUR/USD closes at 1.15000 on Friday. Over the weekend, the market opens on Monday at 1.14100, creating a Weekend Gap. If this price drop happens right after the Monday session opens and is followed by significant trading volume, it could lead to a High Volume Gap. Similarly, a Market Opening Hour Gap could occur when a new session opens with price adjustments from the last session’s close.
Do the gaps impact your prop trading journey?
Yes, gaps can certainly impact your prop trading journey, influencing both your performance metrics and overall trading strategy. Here’s how gaps affect your journey:
- SL/TP might not get filled at your requested price during the gap and trade might stay running and eventually breach the account. This happens due to the fact, during any sort of price gap in the market trading actions tend to stay unavailable.
- Similarly, Limit/Stops Orders might not get filled, or get filled at a much worse price.
Market gaps are an important part of forex trading that can surprise traders or offer new opportunities. Whether it’s the price differences at market opening, the strong moves seen with high trading volume, or the changes that happen after the weekend.