The phenomenon known as a price gap in forex trading is actually a pretty simple concept. The price gap is the empty area, hence the name, that occurs when the opening price of a candlestick is not the same as the close price of the previous candlestick. Despite not that common as in stock trading, gaps do happen in the forex market too, mainly because of the fact that the forex market is closed for retail traders during the weekend but it is still active for operations by the International Bank.
Gaps are areas on a trading chart where a currency price has moved sharply up or down with little or no trading in between. On candlestick charts, a gap is represented by the large distance (space) between two consecutive candles. In other words, a gap occurs when a currency pair jumps from one bar to another with a considerable amount of price distance between the bars. The most likely causes of gaps are lack of liquidity, volume, and market participants. In the forex market, these types of gaps often develop over the weekend and can provide very good opportunities for profitable trades if traders can first interpret their meaning and then exploit the knowledge gained.
There are four types of gap classifications: Breakaway Gaps: Gaps that occur at the end of a price pattern and signal the beginning of a new trend. Exhaustion Gaps: These gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows. Common Gaps: These gaps don’t get placed in a price pattern; they simply represent an area where the price has “gapped.” Continuation Gaps: Continuation gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock’s future direction.
To trade the weekend gaps like a pro you need to be more thorough. You need to consider factors such as currency selection, normal spreads and widened spreads, stop methods and sizes, Target methods and sizes, position/lot sizing and risk management, currency and market volatility, environmental factors and many more considerations that are covered in the course. There could be over 20 currencies experiencing gaps on a Monday morning, and trading so many currencies all at once can be done manually but this process is best if it’s automated.
Gaps provide added confluence to an already-established level in the market, which can help to put the odds in your favor. Just remember these important points when using Forex gaps to your advantage: The larger, more obvious gaps are more likely to produce a change in direction. Gaps that occur at higher time intervals are more influential than those that occur at lower intervals. An unclosed gap is one that is left unfilled for more than five trading days. When using gaps as added confluence at key levels, just remember that the level should stand on its own as key support or resistance level. The next time you open up your charts, be sure to take note of any obvious gaps. They just might provide you with a viable trading opportunity.