Revisiting the Market Gap

Filed under: Learn Forex Trading |

I have already talked a little bit about the market gap recently, but I would just like to provide you with one more example of this phenomenon as there was another good example of this today. If you take a look at Figure 1 you will see the daily chart for the USD/CHF pair (which is the pair for the United States dollar and the Swiss franc). While there might not be an immediate gap apparent here, on closer inspection, you will see that price opened much higher today than it closed at on Friday. This created a temporary market gap that has already been filled.

 

Figure 1.

Figure 1.

This gap is much more obvious on the 1-hour chart of the USD/CHF pair (see Figure 2). Here you can see a massive bearish candle that sticks out like a sore thumb. However what is notable about this is that the gap that the market created by opening higher was immediately filled in this hour’s session. Therefore a short trade could have been taken at the open of this session with a target set at the other side of this gap, and a stop loss of around half of the target level (giving a risk-reward scenario of 1:2). If we had done this then we would have made a very quick profit.

 

Figure 2.

Figure 2.

Going back to Figure 1 we can see that the market has become bullish again, but this was not before this market gap was filled. It just goes to show that the markets really do not like gaps, and these gaps are inevitably filled sooner or later (usually sooner!). My only reservation with taking such trades is that the stop losses tend to be a little illogical and based upon where the target is rather than a logical level in the market.

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