Forex gaps

In forex markets, a gap is a technical figure observable when the opening price of a candlestick moves away from the closing price of the adjoint candlestick, so that there is no overlap in the two trading ranges.

Under normal market circumnstances, candlesticks open at the same level where the previous candlestick was closed. When a gap occurs, instead, a trader can observe on the chart a mismatch between the opening and the closing price of the two adjoining candlesticks.

When and where is it more likely to observe a gap? Usually on spot forex markets at the opening of a new trading week. The spot forex market is in fact very liquid during continuous trading hours. This is why it is very difficult to observe a gap, which is more likely to occur when the market reopens at the beginning of the new trading week. Economic or political events, which have occured during the weekend, while the markets were closed, generate supply/demand imbalances. At the beginning of every trading week, all the main events occured in the weekend are instantly priced in by investors, generating a gap.

Furthermore, a gap is likely to be observed when a new economic data is released, particularly if it is not expected by market analysts (e.g. an unexpected interest rates hike by a central bank).

Gaps are also an important market indicator, because they provide a trader a proxy for its sentiment. When a currency pair gaps up, that means that no traders were willing to sell the pair at that level. When it gaps down, that no traders were willing to buy at that level.

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