Forex Gap Trading Strategies

What is a Gap？

Gaps are areas on charts where prices move sharply on the upside or the downside, creating a price gap. Trading gaps usually occur following unexpected events, data releases or due to technical factors and low market liquidity. Because the forex market operates 24 hours a day and 5 days a week, gaps are more common in forex trading than iother financial markets.

Price gaps take place mostly on Mondays when the market opens at a different price from the closing price from the previous Friday. Unexpected events during weekends are the main factor behind opening gaps in the forex market.

A gap gets filled when the price returns to the same price level at which the gap was triggered. Gap filling can be affected by multiple factors that include:
Price corrections that follow a price gap.
The price faces a strong support or resistance after moving up or down sharply.
The likelihood of a gap being filled is higher when a price pattern is formed. Same applies to exhaustion gaps that indicate a trend reversal.

Types of Gaps in the Forex Market

There are four popular types of forex price gaps as follows:

Common Gaps

Common gaps, also known as trading gaps or area gaps, occur frequently with no major implications on future price movements. They usually happen in ranging price movements, and are commonly known for being relatively small in size and get filled fast. Unlike other types of gaps, common gaps offer fewer trading opportunities.

Breakaway Gaps

Breakaway gaps happen when price gaps near support and resistance levels or at the end of a pattern where a new trend is about to begin. This type usually happens when the market breaks out of its current phase to a prolonged one. At this point, a breakaway gap is formed signalling strong momentum that keeps prices trending. The wider the gap, the stronger the following price movement will be.

Runaway Gaps

Also known as continuation gaps, runaway gaps occur in the middle of a price trend signaling its continuity. Trading runaway gaps can be more profitable when merged with a technical price analysis. An upward runaway gap shows that additional buyers have entered the market to push prices higher. Reversely, when more sellers enter the market pushing prices lower, and creating a sharp price gap.

Exhaustion Gaps

Exhaustion gaps usually appear at the end of a trend signaling a potential reversal as momentum begins to wane. An exhaustion gap is identified by a final gap in the same direction followed by aDojicandlestick that reflects the struggle between buyers and sellers. In order to avoid running into false signals, it is recommended to wait for the completion of the candle to confirm the trend reversal.