Get to know GAP in Forex Trading
Is that GAP?
When the sunscreen opens, which is where the sun rises on the eastern horizon, a sign of trading early in the week on financial markets has been opened. The author was surprised, when almost all pairs related to the US dollar, opened with a ” gap” . Curiosity raged to find the cause of the gap in forex trading , which caused a price jump after the weakening of the US dollar against other major currencies. Apparently, the cause of the gap was the news that former Finance Minister Lawrence Summers, who was a strong candidate to replace Fed leader Ben Bernanke, resigned from the nomination of the Federal Reserve chairman.
Gap indeed often arises between market closure and opening.Moreover, among these market breaks there are major events that can move prices when the market is asleep. So that when the market opens, a significant price jump will arise.
Is “GAP” really? Price gap is an empty space that we can see on a chart created because the opening price of a candle / bar is not the same as the closing price of the previous candle / bar. Usually the gap will be filled again by price movements. But in fact not all gaps are filled again and sometimes act as an area of support or resistance.
Based on the type, the gap is divided into three parts, namely breakaway, runaway and exhaustion gap.
The following is an explanation of the 3 gaps in forex trading:
- Breakaway Gap in forex trading
Breakaway Gap is a gap that occurs together with a trend reversal or reversal. Therefore, breakaway gap is at the beginning of a trend. This type of gap is not always replenished and often acts as an area of support or resistance
- Runaway Gap in forex trading
Runaway Gap is a gap that occurs in the middle of a trend. This type of gap shows the strengthening of the trend and acts as a support for the rising trend, and as a resistance in the downtrend. Therefore, this gap type is not always filled. This type of gap is also referred to as measuring gap because it often occurs in 50% of the travel of a trend. That is, when a runaway gap is formed, we can already predict that the price will likely move at a distance equal to the distance from the previous movement.
- Exhaustion Gap in forex trading
Exhaustion Gap is a gap that occurs before the trend ends. However, in actual conditions, we can identify the exhaustion gap after a trend has ended or reversed.
In the discussion on gaps, we will also recognize top island reversal terms and island reversal bottom. Island reversal is a collection of bars / candles that are separate from other sets of bars / candles. The combination of exhaustion and breakaway gap forms an island reversal pattern. Island reversals can form on peaks or valleys. If it is formed at the top, this pattern is called a top reversal island, and if it is formed in a valley, this pattern is called an island reversal bottom.
The discussion of gap actually has a very close relationship with the concept of trend. By adding an analysis of the gaps in trend analysis, we will be able to cross check to confirm each other. However, the frequency of the gap is not always the same for all instruments. For example, the gap is quite rare in currency instruments. Conversely, the gap often occurs in index, commodity, and other derivative instruments.