What is a Price Gap in forex trading?
Gap can be interpreted as distance. The price gap is the distance or price jump seen on the chart that occurs when stock prices make a sharp upward or downward movement without any trade taking place between the two. Gaps can be made by factors such as buying and selling pressures, earnings announcements, changes in an analyst’s outlook or any other kind of news releases.
Then how does the gap work? We use stock trading example. If a stock closes at the previous trading session at $ 50 and in the next trading day its stock trades open near $ 46 in the absence of trading between two sessions or two prices. Well that’s a gap.
A gap is a common occurrence in all financial markets. However, they are rarely seen in the forex market because it is highly liquid and traded 24 hours a day. If there is a gap in the forex market, the most likely opportunity is often the opening price on the first day of the week.
Gaps are most common at the opening of the main exchanges. Gap when the opening price is a manifestation of the imbalance of supply and demand at the opening of the market in a particular stock. This gap may be created within one night due to news or events that have an effect on the stock price.
Day traders have the sense to take advantage of this gap in order to get a quick profit from the price correction that occurs as sellers and buyers are struggling to find a new equilibrium price. Gaps formed in the intraday market are usually the result of important economic data announcements.
When a gap occurs, there are two conditions that often occur. That is, the price returns fill the gap and the price away from the gap. The first incident is the most commonly done by day traders in addressing the gap that occurred. Actually in addressing this there are two conditions that must be considered.
The gap that occurs when a pair is in a range-bound or sideways condition, then there is a potential pair will fill or close the gap in the near future. Meanwhile, when the gap occurs when the pair is in a strong trend, then the price will continue in the direction of the gap or trend that is happening.