A gap is a jump in the price of an asset, on the chart it looks like a void that is formed as a result of a sharp change in quotes in one direction or another. For example, an asset cost 2.345 units, then the price sharply became 2.365, this gap is the gap.
Origin of the gap
The reasons for the appearance of the gap are different. Most often, this is the beginning of trading after the weekend. Within a few days the market sentiment changes due to the events taking place in the world. There are trading strategies based on the analysis of news and forecasting the reaction of the forex market to them.
For example, when a trade is opened on Friday before the end of trading and closed on Monday. All weekend positions remain open. The trader hopes that the gap will go in the right direction on Monday. But this approach is more like a game where everything depends on the case and cannot be attributed to stable trading. It should be borne in mind that for some assets for leaving an open deal, the broker takes a commission.
The second strategy is based on opening a trade after a gap. But you need to understand the direction and strength of the movement: the emergence of a new trend or is it just an impulse jump. In this case, they work to close the gap. That is, open the opposite position, predicting the gap closure at the original price level. Gaps can occur during a trading day under the influence of scheduled events that can be tracked in the Economic Calendar. The gap often accompanies the publication of the latest indicators of the state's economic situation.
A significant regularity is noted that the smaller the timeframe, the more frequent the breaks. This is due to the fact that information comes to the site irregularly. Interruptions on such charts are technical and should not be regarded as patterns, but on 30 minute and 60 minute timeframes, the reasons should be analyzed.
Such an interruption is generated on all instruments, but the sizes are different for all. Volatile assets are characterized by large gaps. The formation factor in futures trading is clearing, which takes place twice a day, when calculating closed and open positions. The commencement of futures trading after clearing is often accompanied by a new quote that differs significantly from the old price. This also applies to options.
Immediately after the gap, the price tries to close this gap. If it was not immediately possible to return to the original price, we can assume that the movement will continue. If the quotes have not returned to their previous levels, then it is likely that the movement will resume in the original direction.
If the gap is not completely closed, for example, by 50%, then there is a high probability of a movement reversal and continuation in the same direction. Such situations are often formed on cross-rate charts that do not have a dollar.
If the gap is closed after passing 200-300 points, then this signals a weakening of the movement.
Understanding the reasons for the formation of a gap will help to predict price movements and improve trading efficiency.