A forex market gap or price gap is a scenario where the market opens outside the previous bar or the previous day’s range. They are mainly unanticipated, and if they find you in the market without stop losses, you will be in a mess. They also very much frequently happen during market news releases.
Types of gaps
This happens due to a lack of liquidity in the forex market. They don’t mean anything. So you should not be fooled by these gaps that there is a reversal or a trend started. An example is when a market opens at a higher or lower level after a weekend.
These gaps are short-term. However, as a forex trader, you should be careful to determine if the other forces behind the market gap before concluding it are a common market gap.
These market gaps occur when a new trend is just about to take effect. It is mainly at the end of a long consolidation period or after completing some chart creations that work as short-term consolidations.
Runaway Market Gaps
These market gaps are also known as measurement gaps. This is because they mostly form at the middle life of a solid trend.
Exhaustion Market Gaps
These are similar to the breakaway market gap, with the only difference being that it has no chart consolidation next before the gap forms. So this means that the trend reversal or change is very sharp. If you enter a forex trade before this gap happens and you have no stop loss, it is a matter of seconds you may lose a lot of cash since it doesn’t give a warning of trend reversal by consolidating.
How to trade the various types of market gaps
For most of the common gaps, the market gaps will always get filled. This happens due to activities that affect the currencies, but the forex market isn’t traded. So the market opens at a different level from previous. So, once you open your market after the weekend and find such a gap, you should open a chart trade anticipating that the market gap will get filled. Then make sure to put your take profit(TP) just at the closing of the previously closed candle.
Notice the forex trade is opened at the close of the candle after the gap. This method will give a 100% profit.
With the breakaway market gaps, you should open a trade in the direction of the market gap. And, it would be best if you did not wait for the chart gap to get filled. Therefore you can open a long-term trade and use a trailing stop to exit the market order when there is a retrace in the trend. The one way to make sure that a gap is a breakaway is by looking for the chart consolidation of market prices just before the gap.
With the runaway gaps, the gap provides the direction of the market trend. Therefore they show a continuation of the already existing pattern. Therefore this gap affirms the direction of the trend. Therefore it kind of confirms to the traders that a certain trade is real and true. Hence you can open a trade without fear. by measuring the length and range of the previous section before the gap and extrapolating it, it is possible to predetermine when the trend will end thus when to pull out of order with your profits.