Gap formation is one of the many phenomena that may occur on forex charts. Although gaps are rare in forex compared to the stock market, you can’t avoid them. What most forex beginners wonder is if the gaps in the forex market always fill.
Gaps in forex charts almost always fill. However, in some gap types, prices don’t go back to normal, so the gap doesn’t fill. And in other kinds, the gap fills only partially. The speed at which the gap fills and the pips it takes to fill it are sometimes more important than filling the gap.
This article will explain what gaps mean when they happen and whether or not they fill. It’ll also talk about the significance of gaps for forex traders.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Are Gaps?
A price gap means the asset closes at a particular price and opens with another price the next trading day. These market gaps occur because trading hours vary across different time zones. So, the space between trading and non-trading hours creates sharp breaks in currency prices. The new prices can be higher or lower.
Compared to the stock market, forex experiences fewer gaps due to its unique working hours. Stock markets operate on working hours in any time zone, while forex is open 24 hours a day for five days a week. So, price gaps may occur only during weekends when the market is closed. Once the market opens on Monday morning or Sunday evening, the prices may differ from what they were on Friday without any trades.
Forex charts show these gaps as empty areas between a currency’s closing price and its opening price after the holiday. The upward candlestick patterns on charts indicate support for a currency pair, and the downward patterns show resistance to it.
What Causes Market Gaps?
The reason for market gaps during off days is pretty straightforward. When the market is closed during weekends or holidays, the world doesn’t stop going on. The factors that influence currency prices continue to evolve. Political events, natural disasters, and even politicians tweeting on weekends can cause the prices to move without trades.
During working days, gaps may also occur in very short time frames. For example, when there’s a major unexpected news announcement or economic information release, prices may experience gaps.
Another reason gaps occur is liquidity. When traders place orders for a specific currency pair, and no traders take the opposite position, the price jumps to reach the next best bidding price. That’s why thinly traded currency pairs are more prone to gaps.
Do Gaps Always Fill?
Gap filling refers to when the prices go back to the previous price.
Forex experts have a famous saying that goes, “the market always fills the gap.” But only some fill completely, meaning the price goes back to the same price before the gap. Some other gaps fill partially, going back to a portion of the previous price. And some gaps never fill.
Sometimes the gaps fill on the same day, and sometimes it takes days or weeks.
According to historical data, the period it takes for a gap to fill depends on its size. The bigger the gap, the more it takes to fill.
Filling the gap also depends on the type of gap. Four main types of gaps exist in the forex market:
4 Types of Price Gaps in Trading
Common Gap
The common gap appears more frequently than others and is the least significant. That’s why forex traders love it and trade it widely. It usually occurs late Sunday or early Monday when the market opens or after major new announcements. It fills typically within a day and a few price bars.
Exhaustion Gap
The exhaustion gap is much more common in the stock market, but it also appears in forex, though much less frequently. It happens when a long trend starts to move in the opposite direction. In other words, when the trend nears its end, the gap begins. So, after the chart fills the gap, the new trend starts.
The gap can signal a potential reversal of trends, and beginners might mistake it with the continuation gap.
The continuation gap is the result of supply and demand imbalance. For example, when traders see the price is moving in their opposite direction, they try to exit the trades. After that, buying demand won’t be equal to the selling demand, leading to a gap.
In the exhaustion gap, however, participants rush to trade in the trend’s direction. Thus, when the last participants enter, the currency pair will lose its attraction and move in the reverse direction.
Breakaway Gap
The breakaway gap means the price breaks out of an established phase, moving upward or downward. Breaking events trigger this gap that starts a new trend. The gap never fills, and the price continues to move in the new trend. This gap isn’t tradable because it doesn’t fill.
Runaway Gap
The runaway gap, also known as the measuring gap, occurs within a trend already established. When there’s an increased interest in a currency pair, traders get impatient and don’t wait until it reaches an established position. The gap is likely to fill partially, but the prevailing trend continues.
So, although it doesn’t fill completely, it’s a safe trade because traders can predict the price movements after the gap. Also known as the continuation gap, it shows that a trend continues.
The Importance of Market Gaps for Traders
You can use gaps as indications of market sentiment, i.e., how investors feel toward a particular currency pair. For example, when a currency pair gaps up, it shows no traders were willing to sell at the original price. And when the price gaps down, no traders wanted to buy the pair at the original price.
Plus, gaps may go over your stop order when the market is closed, and you have to close the order at a worse price.
Gaps are also crucial in that traders try to take advantage of them and trade them. For example, if the price is down and you buy the currency at the right time, you can make a good profit by waiting for it to go back to the initial position and sell it.
However, not all traders feel the same way about trading gaps. While many traders swear by it, others prefer to do nothing until the gap is over. In their opinion, since some gaps don’t fill, and it’s difficult to predict a gap, it’s better to stay away from them.
Plus, gaps always lead to slippage, which means a pair’s expected price is different from the price at which it’s traded. Thus, gaps prevent them from executing the stop orders as they requested. Besides, it’s impossible to predict when the price goes back to the original place, so it’s not wise to invest in it.
Even if gaps always fill eventually, it matters when the price finally retraces and how many pips it takes for it to fill. After the gap fills, the prices can continue to go in that direction, leading to corrective price action. But if they happen too late or at too many pips, they’re not profitable.
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Conclusion
Forex gaps take place when the previous trading period disconnects from the new trading period. The new price will be higher or lower than the previous time without any trades taking place.
A gap-fill happens when the price goes back to the original price. Although most traders believe gap-fills happen all the time, they occur only with some types of gaps, such as the common gap or the exhaustion gap.
The length of time and the number of pips it takes to fill a gap are sometimes more important than if the gap fills or not.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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