What is a gap?
A gap is a situation in the market where the price of the financial instrument changes significantly and rapidly, and there are no prices between the previous price and the new one.
Why does the gap occur?
The most frequent cause is fundamental factors: news, economic and political may cause significant market movement. Such movement leads to gaps. These factors can significantly move the market between trading sessions.
When may the gap occur?
Gaps occur when the next quote opens at a price that exceeds the closing price level of the previous quote at a distance from the previous closing price. This may happen if the market's view of the price rapidly changes, and there's a sudden influx of buy/sell orders. At some point, the price at the closing stops representing the actual value of a traded asset, and the new price represents it better. It may also appear after a weekend or holiday — especially if major news were announced in that period.
- Breakaway gaps happen at the end of a pattern and signal the beginning of a new trend.
Their main advantage is that it is easy to spot breakaway gaps on the chart. Another one is that by spotting such gaps, a trader can join a new trend at the earliest stage.
This gap has the following characteristics:
- The price begins a new trend;
- Can remain open for weeks/months;
- Is followed by a sharp increase in volume.
- Continuation gaps are caused by a supply and demand rush in the middle of a price pattern; these gaps signal an influx of buyers or sellers who think that the price will continue to move in the same direction.
It has the following characteristics:
- The trend is powerful;
- Forms new highs/lows.
- Exhaustion gaps happen near the end of a pattern and signal a last attempt to hit price highs or lows. During this time, the last part of the market players joins the trend, and there will be no one to support this trend after that.
It has the following characteristics:
- Appear at the end of a trend;
- Prices fail to reach new highs/lows after the gap.
- Besides the types of gaps mentioned above, it’s also possible to see common gaps. They tend to be partial gaps and occur more frequently due to normal trading activity.
This gap has the following characteristics:
- Occur in the trendless markets;
- Have no follow-through.
Please note that gaps can affect pending orders, so if you have any questions or doubts about your order execution, you may contact our customer support.