Price gaps and how to exploit them
Price gaps or what is known as GAP are areas that form a price void or free-of-trade areas that appear on the charts of financial assets.
The reason for their appearance is due to several reasons, the most important of which is the rapid movement of prices, whether in an uptrend or a downtrend, which are called price jumps.
Price gaps are divided into several types that differ in terms of their place on the chart and their impact on price movement
The most prominent types of price gaps are :-
Common gap (Common Gap):
occurs randomly, does not carry a specific indication of trends and often closes quickly.
Breakaway gap (Breakaway Gap):
occurs when support or resistance levels are broken, usually the price breaks through the support or resistance level through a gap, and may appear with the beginning of a new trend in the market.
Continuity gap: called (Continuation Gap) Or (Runway Gap)
also known as measurement gaps, these gaps are considered an indicator of the continuation of the current trend and often occur in the middle of a strong and continuous trend.
Depletion gap: called (Exhaustion Gap)
it appears at the end of a trend, whether it is bullish or bearish, and indicates that the underlying trend may be close to completion and may reverse, and is usually accompanied by large trading volumes and indicates that the market has reached the saturation point, these gaps often close quickly when a new trend begins to form.
Each type of gap carries different connotations for technical analysis and can help traders to make a trading decision and react to it correctly.
The reasons for the occurrence of price gaps
Gaps on the chart appear mainly due to several factors, the main of which are:
1-trading hours:-
Price gaps can occur due to trading hours, for example, when the markets open in the morning, gaps may occur due to developments that occurred during the night trading period, such as economic events or corporate news, this can lead to price gaps expressing significant changes in prices.
2-economic data:-
Therefore, it is important to follow the news and events that will cause the formation of price gaps in the market.
3-natural disasters:-
Price gaps may occur as a result of a natural disaster for a country that would harm the official currency of the state, the occurrence of periods of instability in the market.
Gaps that occur due to trading hours can be expected much more than price gaps that occur due to economic data.
For example, the futures market for the German DAX Index is available for trading from 9 am to 11 pm, then it closes until the next morning, and when the market opens in the morning, the price may not be the closing price of the previous day, in this case we are talking about an opening gap on the DAX.
In the currency market, price gaps often occur between the closing of the Friday evening until the opening of the markets on Sunday evening.
Are the price gaps being closed Prices ?
often return again to close these price gaps, and here closing the price gaps is the passage of prices at levels where they have not passed before, and closing the price gap quickly indicates a weak trend, that is, the trend has been reversed, because the gap plays the role of support or resistance, and if it is broken or breached, the price may remain in the trend.
It is preferable in the case of trading on the price gap, where we buy and sell with the goals of closing the price gap. It is preferable to enter, whether buying and selling from strong levels such as supply, demand, or divergence areas, or by using technical indicators. It is preferable that the goal be part of the gap and not 100% of it.
Assuming the gap is 50 points, it is not preferable to wait for it to close until the end, and we are satisfied with only 70 to 80% of this price gap.
The bottom line is that adopting an inaccurate gap analysis can lead to making wrong trading decisions that result in losses, so the market must always be well analyzed before making any trading decisions and the price gap signals should be supported with other technical analysis tools to confirm the trend.
