Market Gaps (or windows)

Filed under: Learn Forex Trading |

Since the forex market is a 24-hour market (excluding the weekends), there are much fewer markets gaps like there are in the equities market. A market gap is when price opens either much higher or much lower than the previous session’s close, which creates a gap in the market. If you look at Figure 1, you will see exactly what a market gap looks like.

 

Figure 1.

As you can see, the market has closed and then gapped up higher in the next session, creating a vacuum in the market. So what is the significance of this and why are we talking about it? Well, a market gap has a great deal of significance. If the market gaps up as in Figure 1, which sometimes is called a “rising window”, it means that bulls are very confident of price going up and they are willing to take higher prices and pay up. The significant thing about these gaps or “windows” (whatever you prefer to call them) is that they create really good areas of support and resistance.

 

If the market is moving up on a forex pair, and after the weekend close, it opens at a much higher price than the high of the previous candle; you know that bulls are in complete control. What we also know is that if price retraces back down, then the gap in the market, the window, will act as a good area of support. Therefore, if we take a long trade, then we can place our stop loss below the gap and the chances are that price will not move there.

 

When trading forex, we have to trade with probabilities and have a market edge. By using the fact that market gaps often produce strong areas of support/resistance, we can place our stop losses strategically and have a little bit more of an edge. It is these small percentages that ultimately make us profitable in the market.

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