Trading Price Gaps

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Technical analysis of the financial markets represents an important forecasting tool used by the majority of traders especially when combined with a solid trading strategy.

Learning how to effectively identify trends, price channels, and price patterns can provide you with guidance and increase your chances to succeed as a currency trader. One of the several opportunities that are present in foreign exchange is price gaps.

What are price gaps?

Price gaps are areas on an instrument’s technical chart where no trading has taken place. In an uptrend, for instance, prices may open substantially higher than yesterday’s close which creates a gap between prices.

Price gaps happen when there is a substantial imbalance between the forces of supply and demand. In other words, gaps occur because of underlying fundamental or technical factors. For instance, if several orders are placed in a currency pair in one direction when the markets are closed the demand for such a pair has increased substantially. This may provoke for the price to gap up or down.

What do gaps in the market represent?

Each type of gap has a different representation and their interpretation is as well tied to the place they appear during a trading session. Another important aspect to mention about gaps is that their representation will vary depending on any formations that have occurred previously on the charts.

The Three Types of Gaps

Breakaway Gaps: The breakaway gap tends to occur at the completion of a significant price pattern and typically alerts the trader of an upcoming big market move such as a new trend. Significant break outs from market tops and bottoms are another typical area where breakaway gaps arise. In other instances this type of gap may be seen after the break of a trend line which indicates a price reversal.



Runaway (or Measuring) Gaps: After a price move has been underway for a while, prices may gap forward (in the direction of the original move) which would create what is known as the runaway gap.

Runaway gaps have different interpretations based on the direction of the market move they occur. In a downtrend a runaway gap is an indication of weakness and is signalizing a market that may be becoming oversold. On the contrary, runaway gaps that occur in an uptrend signal market strength. This represents the dominance that buyers are having over sellers who continue to liquidate losing positions as the price continues to rise.