A gap is an area on a chart where the price of a currency pair moves sharply up or down, with little or no trading in between.
As a result, the bar or candlestick chart shows a “gap” in the normal price pattern.
Gaps tend to occur unexpectedly as the perceived exchange rate between two currencies changes, due to underlying fundamental or technical factors.
Gaps do appear in the forex market, but they are significantly less common than in other markets because currencies traded 24 hours a day, five days a week.
However, gapping can occur when economic data is released that comes as a surprise to markets, or when trading resumes after the weekend or a holiday.
Although the forex market is closed to speculative trading over the weekend, the market is still open to central banks and related organizations.
This makes it possible that the opening price on a Monday morning will be different from the closing price from the previous Friday which results in a price gap.
Monday’s open price is different from Friday’s closing price. This difference is the gap.
If Monday’s open price was higher Friday’s closing price, the price “gapped up“.
If Monday’s open price was lower than Friday’s closing price, the price “gapped down“.
Types of Gaps
Gaps can be classified into four types:
- Common gaps simply represent an area where the price has gapped.
- Breakaway gaps occur at the end of a price pattern and signal the beginning of a new trend.
- Continuation gaps, also known as runaway gaps, occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the price’s future direction.
- Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows.