Using Gap In Forex Trading
Gap or gap is a sharp rise or fall in prices on the trading chart, which causes a gap between the closing price level and the opening price.
Gap or gap is a sharp increase or fall in prices on the trading chart. This price movement causes a gap between the previous closing price level and the opening price, without any trading transaction, resulting in a gap or “window”. Gaps can occur when the opening price is higher than the previous closing price (up gap), or when the opening price is lower than the closing price (down gap).
Unlike the stock market or futures that often occur gap, in the forex market is rare, and if it happens usually gap down, where the opening price at the beginning of the session or the beginning of the week opened lower than the previous closing price. Here is an example of a gap down the beginning of the week on GBP / USD that happened recently:
The gap is caused by several factors such as strong buying or selling pressures, the release of fundamental data that results far from expectations, strong sentiment due to sudden changing market conditions or extreme geopolitical events. Gap shows strong market sentiment. Traders usually observe price movements around the gap area to find out the change in sentiment. Because it is rare in the forex market, the price level around the gap area becomes an important reference, both as resistance and support.
The area of gap or gap that is not re-closed is called runaway gap or continuation gap. The unclosed gap means the price does not move back to the empty gap area. This kind of gap shows the trend is still going strong. In contrast, closed gaps usually indicate a change of trend direction, and the area around the gap is often used as a stop level. This kind of gap is called the exhaustion gap.
Here is an example of a runaway gap at the beginning of the week that happened August 25, 2014 ago on EUR / USD:
Fibonacci expansion (FE) was taken from May 8, 2014 and correction in mid-June. The down gap occurring August 25 establishes a 1.3205 resistance level coinciding with the 100% level of Fibo expansion. Seen on the next price movement the gap is not closed, or the price does not break the resistance at 1.3205, so there is a chance for the sell entry with the target at the lower Fibo expansion levels (as support levels) such as the 1.2900 level (FE 161.8), and stop loss at 1.3205 resistance (runaway gap area).