All about Gap in Forex trading – Introduction – Types – Meaning

All about Gap in Forex trading - Introduction – Types - Meaning

When trading with the Japanese candlestick chart, sometimes you will come across a price gap between two adjacent candles. It’s called a Gap. When Gap appears, it is the best trading opportunity that you need to take advantage of.

In this article, I will introduce all about Gap as a solid foundation. It will help us dive into Gap candlestick patterns in the following articles to find for ourselves trading opportunities that have a very high win rate.

What is Gap in Forex trading?

GAP is a price gap created by the difference between the open/close price of a candlestick and the opening price of the next one. Under normal conditions, the closing price of the previous session will be the opening price of the next session. However, a multi-step increase or decrease in the opening price of the following session compared to the closing price of the previous session will create a large gap in the chart.

What is a gap in forex trading?
What is a gap in forex trading?

Then there will be the appearance of GAP. The case where the price jumps upwards is called a bullish GAP (or GAP UP). When the price falls below, it is called a bearish GAP (or GAP DOWN).

GAP in the forex market can appear in the following cases.

  • GAP between trading weeks – The interval between the end of this week and the beginning of next week. Although the forex market is closed to speculative transactions, it remains open to central banks and other related institutions.
  • When important financial reports are released that are unexpected compared to what the market is waiting for.
  • Major economic and political developments are announced.
  • Rare cases such as natural disasters, war…
  • The holiday periods cause the Forex market to be disrupted.

Types of GAP

There are 4 types of GAP classified according to their characteristics.

Common GAP

This is the most common type of GAP and has the highest density. This type of GAP is generated by normal market trading activities and tends to fill up quickly.

Common GAP
Common GAP

You may know from its name. There are no major events before a common GAP and the transaction volume does not have a sudden spike. Therefore, it does not have much value for trading analysis or giving ideas for the next movement of the market.

Breakaway GAP

Breakaway GAP is a type whose gap breaks from the old trend as the name suggests.

This type of GAP only appears when there are extremely important news and big surprises for the market, creating a strong psychological wave for investors to make decisions to reverse the market trend.

When Breakaway GAP appears, it creates an area that is seen as a price line breaking through the previous support and resistance levels of the market

For simplicity, you can think of Breakaway GAP as a breakout. Therefore, this price gap may or may not be filled (like a retest or keep moving forward after a market breakout). However, after that, the price is likely to continue moving in the direction it broke out before.

Breakaway GAP
Breakaway GAP

Looking at the example above, you can see that after the Breakaway GAP appeared and broke out of the downtrend, the market ran an upswing and never returned to fill the GAP.

Runaway GAP

Runaway GAP is a trend continuation GAP. In an ongoing trend, the appearance of Runaway GAP will strengthen that trend.

This can be considered the best type of GAP for analyzing the market and making trading decisions.

Some features of Runaway GAP to note:

  • Runaway GAP often appears in the middle of a trend
  • It comes with high volume which further reinforces the confidence that the current trend will continue.
  • Runaway GAP usually occurs after a new trend is formed by a previous Breakaway GAP.
  • This is a trend continuation gap. Therefore, it also represents market sentiment.
  • In an uptrend, the Runaway GAP appears to represent the excitement of the market. On the contrary, in a downtrend, it appears to represent the panic state of the market.
Runaway GAP
Runaway GAP

Since the Runaway GAP follows the trend, it is less likely to be filled. However, you need to remember that GAP only represents market movements in a short period. Therefore, the signals obtained from GAP will also only be effective for a short time.

Exhaustion GAP

Exhaustion GAP occurs when the market has moved a long way and shows signs of “exhaustion”. At that time, it signals that a new trend is about to be formed. It is easy to get confused between an Exhaustion GAP and a Runaway GAP.

Exhaustion Gap
Exhaustion Gap

Many think that Exhaustion GAP appears at the end of the trend. But not necessarily, it can also appear at the beginning of the trend.

The market movement with Exhaustion GAP has the following characteristics.

  • The uptrend has been going on for a long time.
  • The Exhaustion GAP is quite large.
  • The trading volume was large at that time.

In the image above, you can see that the GAP appears relatively large compared to the previous candlesticks. But then the price keeps going down, which shows that there are no more buyers there. That is already the highest price of the trend and a downtrend appears.

Meaning when trading with Gap

With what I have presented above, you can somewhat understand what the meaning of GAP is.

In general, GAP acts as a technical indicator. Their appearances can partly tell investors whether the trend is still ongoing or the trend is about to end to make appropriate trading decisions.

  • Breakaway GAP occurs at the beginning of a trend. It signals a new trend is forming Early.
  • Runaway GAP occurs in the middle of a trend. It consolidates confidence in the continuation of the current trend.
  • Exhaustion GAP occurs at the end of an existing trend or the beginning of a new trend, confirmed by both volume and price factors.
Meaning when trading with Gap

Things to remember when trading with GAP

  • It is easy to find a GAP on a chart. However, you find it quite hard to determine what type of GAP it is. And that is what a trader needs to learn and practice.
  • GAP is not always filled
  • The larger the GAP, the stronger the market movement.
  • GAP on large time frames is much more influential than GAP on small time frames.
  • Trade decisions should not be based solely on GAP. You should combine it with other factors, especially the trend.
  • GAP works well when combined with support and resistance levels.
  • Each type of GAP has its characteristics. Don’t trade without knowing what type of GAP it is.

GAP has always been indispensable when trading. With its special factors, GAP is considered an important technical analysis indicator to help a trader make reasonable trading decisions in the forex market.

Through this article, I hope it will help you understand what GAP is, the nature of GAP, and what it means for technical analysis. As a basis for studying it later, in the next articles, I will introduce you to GAP candlestick patterns. From there, you can have the most accurate explanations and judgments for the movements of the foreign exchange market.

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All about Gap in Forex trading – Introduction – Types – Meaning
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