Market Gaps and Their Implications

Filed under: Learn Forex Trading |

Market gaps are when the market open and closing prices do not match up, and there is a gap in the market. These gaps are particularly obvious on candlestick charts. In the equities market, market gaps are quite common, but in the forex market this is not really the case. This is because the equities markets close every day for fourteen hours or so; and during that time, traders put orders on in response to overnight news or other factors. Thus, when the market opens, these orders are immediately filled and the market gaps.

 

In the forex market, this market only closes once per week, as it is a 24-hour global market. It closes on Friday at the New York Close of 5 pm and opens again at the same time on Sunday night. Therefore, during this time, the same phenomenon can occur as in the equities market, and market gaps can appear.

 

Figure 1.

Figure 1.

Figure 1 show one such market gap, which has happened on the GBP/USD pair (the pair for the Great British pound and the United States dollar) this morning. What you can see here is that price has opened on Sunday night at a price way below the close of the session on Friday night. This has produced a big and obvious gap in the market – but what are the implications of this gap?

 

Well, the market does not really like gaps, and they are often subsequently filled. As such, market gaps provide a good area of support/resistance. However, this level of support/resistance can vary. Sometimes, like on this chart, it will be the low of the last candle (so the low of the bearish pin bar), and sometimes, it will be simply the high of the new candle once it has been completed.

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