A GAP in Forex is a gap between two prices on a chart when one candle (or bar) opens significantly above or below the close of the previous candle.
As a result, a “void” between two price levels can be seen on the chart.
They can occur as a result of sudden changes in market conditions such as news, economic reports or unexpected events that cause massive buying or selling of assets.
In the foreign exchange market, they most often occur after weekends or holidays, when the market is closed and trading activity is suspended.
The release of important economic data (e.g. reports on employment, inflation, GDP) can cause strong movements in the market and lead to a gap.
For example, an unexpected report on the decrease of unemployment rate in a large economy can cause a sharp jump in the exchange rate of its currency.
Political crises, military conflicts, natural disasters and other unexpected events can lead to sudden changes in the currency market.
Such events may occur during the market closing, which will lead to a gap at the opening of the next trading session.
While the forex market is closed for weekends or holidays, economic and political events continue to occur around the world that can affect market sentiment.
This leads to the occurrence of GAPs at the opening of the market after the weekend.
Sometimes they can occur due to sudden changes in the supply or demand for a particular currency.
This can be due to large market players who decide to buy or sell significant amounts of currency in an instant.
One of the most common strategies is to trade on their close.
Many GEPs tend to close, meaning that the market returns to the prices it was at before the gap.
This is because after the initial sharp move, the price often corrects and fills the “void” on the chart.
Traders using this strategy open trades against the direction with the expectation that it will close.
For example, if there is an upward price gap, there is an opportunity to sell the asset in the expectation that the price will return to the level of the previous close.
It is important to remember that not all gaps close quickly, so you should carefully analyze the situation and use stop-losses to limit risks.
Market participants, who use this strategy, wait for the confirmation of the continuation of the movement after the GEP and open deals on the trend.
It is important to closely monitor volumes and market activity to make sure that the movement is supported by big players.
Gap depletions often signal the end of a trend and a possible reversal.
Traders can use this information to open positions against the trend.
Forex GAPs are an important phenomenon that can offer both opportunities and risks.
Understanding the nature of their occurrence and being able to analyze their causes will help you better navigate the market and use them to profit.