Gaps are market phenomena during which the price moves, but no trading is done. When they occur, it means that the price opened at a higher (or lower) level than it closed the day before . On the trading charts, gaps appear as a blank space. The problem is that during their occurrence orders are still being executed. If you placed a stop-loss order in the gap space, it would be triggered with the opening of the market, at the first available price. The situation is analogous with all take-profit orders. These types of events could cause massive losses. On the centralized stock markets gaps occur on a daily basis, as the market opens and closes each day of the week.
On the decentralized Forex market, gaps may occur once a week, after the weekend. A gap may also appear when the market is open and running, if important news is out. In this case, however, the gap will not be significant. There are different strategies on how to trade gaps. The main and most popular one is to open a position and to take advantage of the “filling” of the gap. The gaps may cause a figure called ”Island”, which is a signal for trend reversal.
There are various types of gaps.
Breakaway gap – the price breaks through the level of support or resistance, after a period of consolidation.
Common gap – also known as pattern gap, area gap or temporary gap. These gaps occur when the price is locked between the levels of support and resistance, for short periods of time. The price usually moves sideways and the gaps get filled over time.
Exhaustion gap – indicates the completion of a movement. These gaps follow a quick and significant market move. The exhaustion gap can be distinguished from the measuring gap by the following reversal of the candlestick/bar. The exhaustion gap, however, should not be considered as a significant reversal point.
Measuring gap – also known as a runaway gap. It is formed in the middle of the trend, and is not associated with trend consolidation. These types of gaps normally indicate how long the trend will continue, and remain unfilled for long periods of time. Their opening and closing levels act as lines of support and resistance.