A gap is a gap in the quote on the chart of an asset. On the chart it looks like a gap that is formed as a result of a sharp jump in quotes in one direction or another. For example, After the stock exchange closed, I received important information, which will definitely be taken into account by the market. At the opening of the stock exchange the next day, a Gap is formed, that is, a price gap.
Gap prices on the chart
Why does a gap appear on the chart?
There may be several reasons for the appearance of a gap. Very often this happens due to technical aspects, when a so-called “information hole” appears in the flow of quotes. But traders are more interested in the situation when the Gap appears at natural reasons. In this case, we can talk about a sharp change in the state of the market.
For example, if the market opens sharply upward with a gap, then there is a tendency for significant growth.
The result of such a Gap on Forex can be a long upward trend. In situations where the market opens with a downward gap, we can talk about the emergence of a rapid downward trend.
- Most often, such Gaps on the stock exchange appear at the junction. This is due to the fact that information that arrived, for example, after the stock exchange closed, was not taken into account in the quotes. Accordingly, with the opening of the exchange, it will provoke a sharp increase or sharp drop in quotations, which will manifest themselves in the form of a price gap.
Much less often, a gap occurs during the operation of the exchange.
There must be very good reasons for this. A gap can also appear on the minute chart, especially if ticks are used. But such gaps are purely technical and should not be considered as patterns.
Gap in Forex and how to live with it
Next, we will look at the possibilities of working with Gaps. Most often, a gap in quotes is provoked by some events that the market did not expect. However, such breaks rarely have big sizes. Most often, the opening price is close to the closing price.
In this case, you can try to work to close the Gap. That is, a trader can open a position in the opposite direction of the gap, assuming that the gap will definitely be closed by the price. This style of working really pays dividends in many cases.
Why is this happening? The fact is that the markets are often “operated” by the so-called. They can raise the price too high or too low, especially between sessions. Possessing colossal financial resources, they then become against the main movement (which, logically, should continue in the direction of the price gap).
By closing the Gap, market makers thereby confuse the market even more and after that they can go again towards the gap, forming a stable trend. In order to make money in such a situation, you can consider the possibility of closing the Gap as a signal to action. If it appears on the market, then with a probability of 70-80 percent, it will be closed by the price (although on higher timeframes, the closure may last for years and this should also be taken into account).
John Murphy believed that in order to competently forecast markets using a gap in Forex, it is necessary to clearly determine the place of its formation on the chart. In particular, he identified four types of gaps:
- Simple Gap;
- Gap to break;
- Breakaway gap;
- The gap is about to expire.
Simple Gap on the chart least interesting from the point of view of forecasting quotes. It appears in fairly calm markets or in the middle of trading ranges. The appearance of a gap indicates that there is little interest in the trading instrument on the part of players. Even small investments in such a market can lead to the appearance of a gap. Most analysts ignore this signal.
Gaps to break are already more interesting from the point of view of potential profit. They are formed at the completion of certain price patterns and can precede significant market changes. Such a gap can be found in most patterns, although it is quite rare. But if it appears, the signal is significantly enhanced.
It should be noted that such price gaps are usually accompanied by a significant increase in trading volumes. Such gaps usually do not close or close, but not completely. Moreover, a certain pattern can be given here - the larger the volume during the formation of such a Gap, the less likely it is that it will close later.
Breakaway gaps is formed in the course of the current trend. Sometimes, there are several such price gaps. Such a gap on the chart indicates that the trend will continue, since the market moves along the trend without any effort and on relatively small volumes.
Most Forex Gaps of this type are formed approximately in the middle of the trend. If we count how many points the price moved before such a gap formed, we can roughly calculate how many points are left before the reversal. To do this, the first value is doubled.
Gap at the end appears at the end of the trend. Typically, it is preceded by avulsion and rupture tears. We can say that the gap appears at the last gasp of a trend. By the way, it can be used to open an opposite position in the market. To do this, you need to wait until the price falls within the Expiration Gap and begins to close it.
Jack Schwager on gaps in Forex
- Regular Gap;
- On a breakdown;
- Gap acceleration;
- Gap of exhaustion.
Just like Murphy, Schwager believed that the usual Gap was not interesting for analysis. As for the breakout gap, it appears when the price goes beyond a certain range. In principle, here Schwager is also quite close to Murphy. If such a Gap does not overlap for several days, it can be considered a very significant trading signal.
The acceleration gap is Murphy's analogy to the breakaway gap. Such a gap on the stock exchange is formed when the price trend accelerates. Schwager believes that similar gaps can follow each other from day to day.
Finally, an exhaustion gap appears when a trend is in its final stages. Here Schwager makes the same point as Murphy. A gap like this can be used as a signal that a trend will soon end and a new one will begin.
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If you are just starting to explore the Forex market, then you may have already encountered such a concept as a gap. What is a gap on Forex or any other financial markets? The very meaning of the word gap comes from the English gap, which means “gap”. So, a gap in technical analysis means a significant break in the flow of quotes. If you look at a gap on the charts, you will see a gap between the closing price of one candle and the opening price of the next candle - the closing price and the opening price are at some distance from each other, which clearly stands out on the chart:
Rice. 1. The price gap on the chart is a gap.
Such gaps or, as they also say, price jumps and are called gaps. Any trader should know about the specifics, possible reasons the occurrence and consequences of gaps.
Causes of gaps.
What is a gap and what are the reasons for its occurrence? There are several reasons why gaps occur in Forex. The most common reason is a technical one - an incomplete flow of quotes arrives at the trading terminal. As such, such gaps do not have any significance or influence on trading processes.
Sometimes gaps in Forex can appear in holidays, at the time of release or on the closing days of the month (year), both in the foreign exchange and commodity, stock or other financial markets. By the way, at the time of the release of important economic news and on the closing days of the month, Forex often experiences sharp price jumps, in both directions, so trading in such cases is strictly not recommended unless you clearly understand what you are doing.
A gap can happen on hourly, half-hourly and other time frames (within one) for seemingly no apparent reason - and it will be a random gap, and not a signal to any further direction of price movement. Please note that it is the gaps that cannot be taken into account, and not the reasons that contribute to their occurrence! Such gaps happen quite rarely. The reasons for their occurrence can be events such as serious terrorist attacks, major disasters, coups in leading countries, since these reasons still directly or indirectly affect the economy and exchange rates. An example of such an event is the explosion at the Fokushima nuclear power plant in 2012, which immediately led to the emergence of gaps and a prolonged fall (growth) of many currency pairs.
The other case is more important and involves the formation of a gap in a continuous flow of prices as a result of fundamental events. These are the gaps you need to pay attention to first!
Depending on the type of market, a period should be understood as different periods of time. For commodity markets, the period will be 1 day, since trading on them is carried out during a certain part of the day. In the Forex market, a period can already be considered 1 week, since trading on it is carried out around the clock, with the exception of weekends. And on weekends, informal meetings of major bankers, finance ministers and other leaders in the global financial sector are not uncommon. As a result of their decisions and statements, significant price changes follow, and, consequently, the appearance of gaps at the turn of two weeks. These are the gaps that are most important for trading, so let’s take a closer look at what consequences a trader can expect as a result of a gap from Friday to Monday.
Consequences of gaps at the turn of two weeks.
So, let's assume that you have an open buy order at a price of 1.3000, a take profit at 1.3050 and a stop loss at 1.2980, and today is Friday. The market closes at 1.3040. What does this order expect when the market opens on Monday if there is a gap?
- Option 1 - the market opened with a gap down. As you remember, according to the conditions of the example, the market was closed at a price of 1.3040. And it opens at a price of 1.2900 - as they say, it “hit” down. Do you think the order will be closed by stop loss and you will lose only 20 points? You're almost right, but not quite. The stop loss will work, but at the market opening price and you will lose 100 points, not 20 as planned;
- Option 2 - the market opened with a gap up, at a price of 1.3090. And the take profit order will work, but again, at the market opening price, the profit will be 90 points versus 50 expected.
Therefore, every trader should know that the Friday gap closes orders not according to the level of the set stop/profit, but according to the market opening level!
To combat the Friday gap, before the market closes, you can remove stop losses and take profits. Or set their values that the gap definitely cannot reach - for example, 1000 points from the order opening price. And at the moment the market opens on Monday, return them to the values that the current situation dictates.
That is why on Friday gaps (or gaps at the junction of weeks, as they are also called) you can both lose and make money. If an order was opened before the weekend, and after the weekend a gap appeared in the desired direction, then such a short-term position will bring unexpected profit, which should be fixed in time. In most cases, after a gap, the price continues to move in the direction of the gap for some time, which means you can earn even more by leaving the deal open until the gap begins to be compensated and the price begins to reverse. And a price reversal after a certain period of time after the formation of a gap occurs in 70% of cases:
Fig.1. An example of price returning to the closing level previous period after the gap.
But it happens that the price continues to move in the direction of the gap and is not compensated. And this situation is a real gift for traders who trade using medium- and long-term strategies and who have previously opened positions in the corresponding direction.
If a gap occurs against an open transaction, but does not reach the established stop loss, then new week For a trader it starts with trouble. Close the position with the loss that is on this moment, or wait for the price to reverse and return to the gap after some movement? The probability that something will happen and the trader will find himself out of the market is very high if you do not know how to manage such situations and do not follow.
Believe it or not, there are strategies based on gaps! It will be very useful to familiarize yourself with them, since sooner or later every trader encounters such a phenomenon as a gap and you need to be able to react correctly to it. And in order to make money on such a phenomenon, and not lose, you should have certain theoretical knowledge of what a gap is, and at least one gap trading strategy in your arsenal.
Hi all!
Today we’ll talk about gaps in trading. A gap refers to the price gap between the previous and current bar.
In today's article you will learn:
- What is a gap on the stock exchange;
- Causes of a gap;
- Is it possible to make money on Gaps?
What is a gap on the stock exchange and the reasons for its occurrence?
Gaps occur for the following reasons:
- The release of important economic news, which causes a sharp jump in prices. Therefore, it is necessary to carefully monitor the release of news and, if necessary, cover the position in time.
- A gap may occur after clearing on futures due to a clear change in market conditions.
- The most common reason that can very often lead to strong gaps is the opening of the market after a break. Most often, a strong gap can occur when the market opens after a weekend on Monday or after long holidays. It arises due to the fact that during the market closure important news could come out or the situation on world markets could change. And also, due to a strong imbalance of supply and demand. For example, a gap in shares of 2-3 tiers when the market opens after reaching the level on the previous day. Here are a couple of examples:
- In stocks, gaps arise due to the dividend cutoff. After the register is closed, the share price the next day drops by the amount of the dividends.
- Due to failures on the Moscow Exchange, after which the market may open with a gap. This has happened more than once.
Features and beliefs of traders
So, we have discussed the main reasons for the occurrence of gaps, and now I will tell you about some features and beliefs that exist among traders. Many traders believe (and there is such a postulate in classical technical analysis) that the gap must close sooner or later. In fact, this is not entirely true. Firstly, the gap may close unknown when, maybe in a year, maybe in two, or maybe not. There are many such examples that can be given. Therefore, I would under no circumstances make this statement the basis of my trading system. I have seen cases more than once when a trader opened a position in the opposite direction after a gap, and then sat out the losses. So be careful.
The strongest gaps often occur on less liquid instruments, for example, on 2-3 tier shares. Therefore, you need to approach trading on such instruments very carefully, always strictly observe the risks, and if you are trying to catch a gap, you must clearly understand what you are doing and have formalized rules.
Is it possible to make money on a gap?
I can say with confidence that it is possible, since I have been trading gaps for quite a long time. True, I only trade them on stocks. You can make money both on liquid shares and on 2-3 tier shares. Beginners should not ATTEMPT to do this. You must have experience, clear rules and a system, and everything must be tested. There should be no intuitive trades! Especially if you trade gaps on illiquid assets! It is especially important to observe risks with such instruments! Many traders are afraid to catch a gap because they believe that the risk is too high. But if you find the necessary patterns and strictly follow money management, then there will be no more risks than with regular trading.
I've met a lot various advice on trading gaps and catching them, even on the channels of famous traders who will not work in the current market. Moreover, most often, old postulates that have long become obsolete are used to catch them. For example, any gap must close. Or another option is to enter the position in the first seconds after the opening. With such an entry, often, most of the movement will be missed.
In general, a couple of recommendations. Don't listen to this advice, look for your own patterns. Observe how the security grows, what percentage of growth/decline it shows by closing, what levels it has broken through for the current day, whether this instrument is stronger/weaker than the market, etc. And perhaps you will find some interesting pattern :) Don't be afraid of tier 2-3 stocks. If a security was weak in the past, but suddenly on the current day showed a strong surge in volatility and a large percentage of growth, perhaps this paper there is an order and there are major players in it. Keep an eye on such papers. I tell all my developments, thoughts and nuances of trading on gaps on.
I will end here. Profits to all. Bye.
There are many trading strategies that exist in the Forex market. Traders take profit from the movement of moving averages, the location of support/resistance levels and, of course, from news releases. Indicators and advisors work day and night to ultimately issue a signal or independently open an order that has potential.
Against their background, techniques based on GEP with their simple trading strategies(TS), which any trader can master, regardless of his Forex trading experience. In order to successfully use GAP in Forex trading, you only need a chart of the currency pair and a minimum of skills in working with the terminal - open an order, place it, and, if necessary, screw it in to protect the profit received. Making a profit becomes a purely mechanical matter that requires a little patience, perseverance and a basic set of money management knowledge.
Why then, such an interesting and simple strategy ended up “behind the locomotive”, and investors in the foreign exchange market do not resort to it so often? Let's take a look together at what a gap is and how you can use it competently (and most importantly, profitably) in your Forex trading. In this article I focus on the following issues:
- GAP in Forex - what is it;
- The main causes and characteristics of price gaps;
- Methods and strategies to make money on the gap.
What is a gap and how do price gaps appear?
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Translated from English, the word GAP means gap. Since we are dealing with the price flow in the terminal, in our case any visible gap in quotes on higher timeframes (from an hour and above) will mean the presence of a gap. You don't have to look far for examples. The trading week, which began on June 15, has a gap in the flow of price data for many currency instruments. In other words, the closing prices of trading on Friday and the opening prices on Monday are significantly different, and this can be seen, as they say, “with the naked eye.” I will add that not all indicators visually display the gap. For example, if a trader uses non-standard types (renko, kagi, broken line) then he will not notice the changes, unlike investors who use Japanese candlesticks or bars. As a rule, the cause of a gap is fundamental or global events that lead to a revaluation of the value of an instrument or an entire group. By nature this event can be attributed to what happened:
- On the closing days of main trading;
- During the trading session.
The most common gap in Forex is one that occurs over the weekend. While traders and trading platforms are resting, fundamental news is being released (often Pacific countries and China publish economic reports on Saturday), unexpected natural or man-made disasters can occur. Most brokers adhere to a standard trading regime, which stipulates that the new week begins with trading in New Zealand and ends on Friday, along with the closure of the Chicago market. However, minor speculation activity is observed on Saturday and Sunday, although it is not widespread. Operating regional platforms with a minimum number of participants cannot generally change the “status quo” recorded at the time of the closure of the world's main exchanges. But, nevertheless, emerging economic reports and news shift quotes in a certain direction. If these changes are significant, then the week opens with a gap.
I would also like to note that trading in the CFD sector, metals and a number of instruments (for example, futures, shares and other derivatives) has a working schedule that is different from the foreign exchange market. I track weekend pair fluctuations on these sites: forex.tradingcharts.com, www.xe.com.
For reference: trading in cryptocurrencies that have the required amount of liquidity (BTC, LTC) occurs seven days a week, 7 days a week and 24 hours a day. You can try it yourself by opening an account with , which was the first among CIS brokers to provide full access to exchange trading with new highly liquid instruments.
The gap that occurs during the trading session is quite a rare event. As a rule, only serious reasons may cause a sharp break in the data flow. Such reasons include a report of a major terrorist attack, earthquake, large-scale disaster, or a sudden decision by a major financial regulator. In particular, in January 2015, the decision of the Swiss National Bank to abolish the limited ceiling on the CHF/EUR exchange caused a colossal gap in all pairs with the Swiss currency. In previous years, news of the 9/11 attack and news of the explosion at the Fukushima nuclear plant in Japan also led to significant price gaps.
How to make money as a trader on the gap
One of key points, which traders use when working with trading vehicles based on the occurrence of gaps, is the ability of quotes to return to the original place of the gap, or, in another way, to “fill” it. I will not cite in this article all the conspiracy theories of “market makers” against “honest” traders presented on the Internet.
Statistics show that in a live “liquid” market, the return to levels preceding the price gap is more than 60%.
This property gives the trader a kind of trading signal with high degree reliability. GAP strategies are not as relevant now as they were several years ago. Last years The volatility of foreign exchange market trading is falling, so there have been no gaps of 200 points or more for a long time. But this does not mean that you should neglect a strategy that will consistently give from 20 to 40 points at minimal risk not detention.
Before continuing further, it is worth adding a few more qualifications of gaps that have migrated from the stock and derivatives market to the forex market. The patterns of trading behavior discussed below require a certain skill to work with them. They are not perfect, but they can be useful for those who want to work ahead of the situation, rather than submissively following the crowd. Like the main technical analysis figures (pennant, triangle, GP), they are signals of trend continuation or reversal. Gaps indicating the emergence of a trend are highlighted separately, but such a signal must necessarily be confirmed by other indicators.
The price gap, which indicates the beginning of a new trend, is the most difficult to analyze. The onset of a serious market movement may be indicated by the following factors preceding it:
- Quotes spent some time in a compressed trading range, forming strict support/resistance levels;
- The breakout of the congestion area was accompanied by volume that exceeded the trading volume preceding the breakout;
- The breakout point becomes an area of support/resistance, which prevents the gap from closing completely.
I will add that such gaps were relatively rare during the period when pairs were moving several hundred points a day. In our time, they can only arise due to some extraordinary events. The last example is the actions of the same Swiss National Bank, when in a matter of seconds the price went beyond the range (the corridor of previous quotes) and was much lower than the medium-term support.
One of the most easily identified signals is the gap of trend continuation. On the chart it is always located towards the trend. Like the gap at the beginning of a trend, it may not close completely, or it may take some time to fill.
The trend end gap is quite easy to recognize. Its main difference from previous signals is that after its occurrence a local top/bottom is always formed and that it always closes. Sometimes a trend exhaustion gap is formed on a large volume of orders, so “unsavvy” traders mistake it for a trend continuation figure.
Obviously, the safest entry into a trade is provided by the trend exhaustion gap. In other cases, incorrect interpretation can drag the order into . To ensure the protection of your deposit and ensure systematic profit growth, you need to make informed decisions when opening a transaction. Here are a few factors that must be taken into account when entering the market:
- The price gap is more than 20-30 points;
- There is a confirmed history of the currency instrument, which indicates that the closing of the gap occurs much more often than its failure (in 70% of cases);
- The trading target should be set in the high or low area (depending on which direction the gap opened) of the last candle on a time frame of at least M30;
- The ratio of TP and SL should be no more than 1:1.5;
Working out gaps that arose during the trading session is a subject for a separate discussion. As a rule, filling them out takes a lot of time, since this phenomenon in itself is evidence of a global break in the trend and a restructuring of the value system in the market. They can be used as signals for the initiation or continuation of a trend. It is much easier to find and take advantage of price gaps that occurred over the weekend.
In the event that on Monday the market opens below/above the last price on Friday, many trading orders set by traders earlier are activated. Some of them like to place protective stop orders, close significant levels indicated on the last working day. And here the rule comes into play: the market does not go where everyone expects, but where the players’ stops are.
You should be careful and expect that in the first trading hours the movement will go in the opposite direction to the return. You should not enter into a deal immediately when the market opens. Wait for the candle to form on M30 or H1, and when it closes, open an order, not forgetting the rule SL= 1.5*TP. The goal will be to return quotes to the top/bottom of the candle preceding the market close, adjusted for market fluctuations of up to 10 points.
How often do price gaps close? According to statistics, the GBPJPY, GBPUSD and EURJPY pairs have a 70% chance of closing the gap, and the EURUSD pair has a 66% chance of closing.
Conclusion
If we summarize everything written above, we can say with confidence that trading using a gap development strategy can become both an addition to a trader’s existing trading systems and a separate technique. Don't avoid trading gaps just because the area is unexplored. A good trader, like a high-quality diamond, has a lot of honed skills that make his trading profitable and unique. It is better to spend some time studying and applying new knowledge to yourself than to simply turn away from a potentially profitable vehicle. You can test the strategy at, for example, the company Amarkets ().
Who knows, maybe a clearly recognized and qualified gap will be the beginning of a successful trader’s career, especially since the technique of its recognition itself requires only time and a little diligence.
Profit to everyone!
Gap in technical analysis means price “gap” from English. the words "gap". Visually on the chart gap indicates that no transactions with the instrument were made in this price range.
How and why do gaps occur?
Price gaps largely arise due to the fact that the price strives for equilibrium and, as a result, restores parity between markets - this is due to the fact that trading around the world is carried out not around the clock, but in sessions.
For example, it is known that the stock markets of all countries are oriented toward the American market, including Russia. Our trading starts at 10:00 Moscow time and ends at 18:45 Moscow time, while America opens at 17:30 Moscow time and closes at 00:00 Moscow time. Thus, after the closure of Russian exchanges, trading overseas continues and, depending on the direction of their movement, it is possible to predict in which direction the gap will form in the morning at the opening of the Russian market.
Let's assume that the American market has grown very strongly overnight and Russian traders at the opening expect an upward gap of 1-1.5%. This happens because sellers do not want to sell shares at yesterday's prices, knowing that America is positive, so they sell at higher prices, bypassing a certain price interval - which means buyers have to buy at higher prices, resulting in a price gap or gap is formed.
All gaps must close
There is a rule “All gaps must close.” But in practice this may not always be true. If you look at the history of some charts, many gaps still remain unclosed and if the market moves in this direction, the collapse could be more than 90%, which looks unlikely. Therefore, it is very important to distinguish between the types of gaps in order to understand which ones are important and which ones are not.
Types of gaps
- A simple gap most often occurs in a sluggish and illiquid market as a result of a lack of significant supply and demand. Such a gap is of no value for predicting price movements and rather indicates a lack of trading interest on the part of investors.
- Gap “to break” – this type A gap is formed, as a rule, when the formation of important patterns is completed technical analysis, for example, “inverted”. In this case, the gap occurs at the “neck” level and is accompanied by increased trading volume. Such a gap is unlikely to close, because shows the strength of the market in the direction of the gap.
- Gap “breakaway” - this type of gap occurs in the case of a long-term market. Approximately in the middle of such a movement, a gap forms on low volumes (there may be several of them in a row) and the trend continues in the same direction. With an upward movement, this indicates the strength of the market, with a downward movement, this indicates its weakness.
- Gap “on the way out” - this type of gap occurs at the end of the main movement and can be a signal of an imminent change in the trend in the market. It is formed after fixing a “break” and “break” gap on the chart. In this case, complete closure of the downward gap (in an upward trend) is a good bearish signal.