Gap trading
what is a gap?
A gap is when a 'gap' or a 'space' is seen on a price chart. For example, look at the chart below and you can see that there is an empty space where price has 'gapped' over the weekend on the AUDJPY pair in early March. This is called a gap.
When do gaps occur?
A gap occurs for a couple of main reasons in the currency markets. The first time a gap can often occur is when the market opens on a Sunday evening (GMT time) as above. The close price on Friday may be significantly different than the open price on a Sunday. In the instance above Sunday's opening price was lower than Friday's close price. The AUDJPY, as the go to risk currency pair, was lower on COVID-19 fears which grew over the weekend.
The second time a gap occurs is when there is a sudden influx of buying or selling interest in the market. This could occur on a strong data point deviation or other unexpected news event. It happens when the market is open and so price 'gaps' and leaves 'blank' spaces on the price chart. It tends to happen more often in stock markets than FX markets.
Trading a Gap
The GAP can be traded as price often returns to the gap. So, some traders fade the initial move and wait for the gap to be filled. Other traders will buy or sell when the gap is filled. The relevance depends on the reason for the gap. If the reasons for the gap are very strong then the gap may not be filled for some time. Circumstances dictate the approach to take.
