What is a Gap? The term is often heard, but many traders who do not really understand it
Gap is a term that refers to the empty space between the trading period and the previous period. Gaps will appear when fundamental events are fundamental such as the emergence of financial statements and economic data.
Gap price movements can be found in bar charts and candlesticks, but will not be found on point and figure or line chart. The reason is simple, because in the last two things had every point connected to each other.
Many traders say the gap is going to be replenished and that means the price will start moving back and closing the blank range of trading. However, before you take advantage of this opportunity, things that need to be well understood are things that are not always the case. It may even take a long time for the gap to be replenished.
Here are 4 Gap Types You Need to Understand
1. Common Gap
Common Gap often occurs during the price movement process, for this reason also common gap is often not considered important when compared with other gaps.
Common Gap occurs when prices start to move in a limited range and sometimes the gap that occurs is not large and tends to be small. This can happen because of normal trading activity, such as the existence of low trading volume. This type of gap will usually recharge quickly and will move into the price before the gap.
2. Break Gap
This type of gap usually occurs after the price starts moving in the consolidation phase. It occurs when the price is not moving within a certain trend and starts moving in a limited range. This type is called the Breakaway Gap because it can cause the price to go out of consolidation and possibly form a trend.
A strong breakaway gap out of the consolidation phase is considered a much stronger trader than a non-gap consolidation breakout. When this gap occurs it indicates there is a big increase in sentiment towards the gap and could have persisted in some period of time which then triggered the next price movement.
Whether or not this gap can be confirmed by looking at the volume that occurs when a gap is being formed. When the volume is large, then this indicates the price will move in the direction of the gap that occurred. This will also reduce the possibility that the gap will close again in the near future.
Even if it is commonly noticed that the breakaway gap is not closed again in a short period of time, it may happen occasionally. Breakaway gap often becomes the support and resistance of the price movement. When the breakaway gap rises, then the lowest price of the second candlestick will be support. Meanwhile, when the breakaway gap falls, then the second highest candlestick price will be the resistance.
3. Runaway Gap (Measuring Gap)
This one gap usually takes place in the middle of a trend and often occurs after the price has a strong movement. This is a good indication that the ongoing trend will continue as the sentiment signal continues to improve. With increasing interest in buying and selling will create this gap and the continuation of the trend.
The volume present in the runaway gap is less important than the breakawaay gap, but can be compared with the average volume. When the volume is too extreme, it gives a signal that the runaway gap is an exhausting gap which is a signal of the end of a trend.
The thing you need to know here is that the runaway gap will form the same support and resistance with the breakaway gap. Another thing that is the same is runaway gap is not quickly closed again, because if closed quickly will give an indication of the trend formed weakened.
4. Exhaustion Gap
This type of gap will usually form at the end of a trend which is a negative signal that the trend is changing direction.
In order to easily identify an exhausting gap, this gap should be marked with a very large volume. In addition, the strength of the signal will increase as this happens after the previous price makes a significant move.
Since this type of gap indicates a trend reversal, the gap must be closed quickly.After exhausting the gap, the price will usually move sideway first before finally moving in the opposite direction.
When the price successfully closes the gap again, then this pattern will be considered to be perfect and give a signal that the trend will reverse.
In addition to the 4 types of gaps we have mentioned above, there is also island reversal which is a pattern gap that many traders know. Island Reversal is formed by a gap and then there is a movement that tends to flat and then confirmed by another gap moving in the opposite direction.
The pattern above is a very strong indication of a top or bottom in a trend and an indication of a trend change.
Overall that’s a complete explanation that we can convey in relation to what is a gap and various types of gaps that exist. Basic understanding of this gap aims to be able to understand well what is going on in a trading that is being done. Beginners we strongly recommend to understand the above explanation well before starting to trade in the forex market .
If you can not understand the above explanation well, then do not expect you can get more profit in forex trading is being done.
If you are still confused by the above description of the topic, feel free to ask through the comments field below. We are happy to answer any incoming questions we will answer to help you.
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