What is a gap? Why does my chart show a gap?

Gap in the foreign exchange market refers to a sudden jump in price during a certain period of time, forming a ‘blank’ area on the price chart. Gaps are also common in the Forex market, especially at the opening of the market or when affected by major economic news. Below are some detailed explanations of Forex gapping:

Definition of Forex Gap

A gap is a ‘blank’ area on a price chart that appears between two adjacent time periods (such as between one trading day and the next). This means that the price did not pass through the gap area between these two periods.

Types of Forex Gaps

1. Breakaway Gap:
   This gap typically occurs when the price breaks through significant technical levels, such as support or resistance. It is often accompanied by high trading volume, signaling the beginning of a market trend.

2. Runaway Gap:
   Also known as a "continuation gap," this type of gap occurs within a clear trend, indicating the continuation of that trend. For example, an upward gap in a strong uptrend.

3. Exhaustion Gap:
   This gap typically happens at the end of a trend and may signal the end of the trend. An exhaustion gap can occur when the market makes its final price adjustment, and the price returns to the gap area.

4. Common Gap:
   This type of gap does not always accompany a significant trend change and is often just part of normal market fluctuations. It usually occurs during consolidation periods or when market liquidity is low.

Why do Forex gaps occur?

1. Market news or economic data:

• Major economic data releases (e.g., nonfarm payrolls report, GDP data, etc.) or sudden political events (e.g., election results, geopolitical conflicts) can lead to dramatic changes in market sentiment, which can trigger a short jump.

2. Changes in liquidity at the opening of the market:

• The foreign exchange market may see price jumps at the opening of different trading sessions (e.g. Asian market, European market, US market). Especially at the opening of the market after a weekend or holiday, prices may jump significantly.

3. Market expectations and sentiment:

• If the market expects an event to have a significant impact on a currency pair, prices may jump around the time of the event.

4. Liquidity Issues:

• The foreign exchange market may be less liquid during certain periods (e.g., non-major trading sessions), resulting in sharp price fluctuations, which can lead to short sales.

How to deal with Forex gaps?

1. Analyze Gap Types:
   Understanding the types of gaps helps assess their potential market significance. For example, a breakaway gap may indicate the start of a new trend, while an exhaustion gap may signal the end of a trend.

2. Combine with Other Technical Indicators:
   Use other technical analysis tools (such as support and resistance levels, moving averages, volume, etc.) to validate the meaning of the gap and the possible market direction.

3. Develop Risk Management Strategies:
   Gaps can lead to significant market volatility, so it's important to establish appropriate stop-loss and take-profit strategies to manage risk.

4. Monitor Market Sentiment and News:
   Stay updated on market news and economic events to understand potential reasons for gaps and adjust trading strategies accordingly.

Forex gaps are part of market dynamics, and understanding their causes and market impact can help you make more informed trading decisions.