What is a Forex gap and its positive and negative sides
The currency exchange does not work all the time, its activities stop on weekends and holidays, but at the same time, exchange rates still move, as a result of which such a phenomenon as a gap in Forex arises.
Forex gap is the occurrence of a gap in currency quotes, in which the previous time frame closes at one price, and the next one opens with a completely different value.
Is the occurrence of a price gap easily determined by looking at a currency chart? Upon closer examination, you can immediately see that the new candle opened at a price different from the previous one.
As a rule, this phenomenon occurs during breaks in the operation of the foreign exchange market, but sometimes it can also occur in the middle of a Forex working session .
The reason for this phenomenon is strong news that causes strong volatility and rapid trend movement in the market.
Often such news appears on weekends when the exchange is not functioning, so Monday holds the record for the number of gaps.
How to determine a Forex gap on a currency pair chart
In order to see the gap that has occurred in the Forex market, it is enough to switch the appearance of the chart in the trader’s trading terminal to Japanese candlesticks or bars. And scroll through the history of the movement of the currency pair.
The reasons for the gap may be events that occurred during the weekend or a fairly strong and sharp trend movement.
For example, a natural disaster in the country to which the currency used belongs, such as a flood in Australia, will definitely cause price gaps on the charts of all currency pairs that include the Australian dollar. The gap can have two directions, depending on the event and what currency (base or quoted) our monetary unit is.
The easiest way to understand the nature of this phenomenon is to use specific examples. Let's take the previously mentioned Australian dollar as a currency; the factor that influenced its rate will be the same flood that occurred over the weekend.
First of all, we determine the direction of influence, in our case it is definitely negative, which means that the Australian dollar will go down. At the same time, for pairs where this currency will act as the base (AUDCAD, AUDJPY, AUDUSD, etc.) there will be a gap in the downward direction. And for the instruments EURAUD, GBPAUD, the opening price of a new session will most likely be higher than the closing price on Friday and an upward trend will form due to the depreciation of the Australian dollar.
Positive and negative aspects of gap in Forex
The main negative aspect of this phenomenon is that stop orders are triggered at the first available quote. And it often turns out to be less profitable than the stop loss set by the trader himself.
As a result, the planned loss increases several times, and sometimes a Forex gap can lead to a complete loss of the deposit.
At the same time, there are a lot of Forex strategies built on price gaps; you can find an example of one of them in the article “ Gap Strategy in the Forex Market ”.
But, unfortunately, most of these trading options are of questionable effectiveness, since the trend after a price gap does not always move according to the same scenario. In order to somehow protect yourself from unpleasant surprises, before placing orders, first analyze the history of the trend movement before the price gap occurred.