GAP on Forex
A formation on a price chart known as a "GAP", which stands for "price break", is classified as a technical analysis pattern. Under certain conditions, such formation allows to analyze and predict the price behaviour and works out perfectly in deals.
How to determine the Gap on the chart
Visually, it represents a break in the price curve with a sharp jump up or down, either with or against the trend. It is not equally visible on different types of charts. For example, on the candlestick and bar chart, the GAP is clearly visible, while on the line chart it is more difficult to detect.
Why does GAP occur?
The reasons for its emergence in different assets can be different, but they are associated with a single component - a sharp change in the market situation. Price gaps can form in the following circumstances:
- During the weekend.
The information that comes after the market closes is not considered in the quotes, and at the market opening, this factor will cause a sharp fall or rise in the quotes with the formation of a gap in the appropriate direction on the price chart.
- At the change of trading sessions.
Such a GAP is formed due to different circumstances of the market. It occurs rarely, it appears against the background of abrupt changes in the market, and with a proper understanding of the market situation, it works well. For example, if the opening of the session is accompanied by a sharp upward price break, the market situation can be considered in the perspective of an upward trend. If there is a GAP going downwards, we can assume that a downtrend is about to form.
- When an "information gap" appears in the quotes flow.
This event should be considered as one of the technical aspects when the market stalls on the background of a long absence or on the eve of the release of, particularly important news. If the forecast for the respective asset coincides with the news event, the price gaps on that asset will be minimal, otherwise, a large and beautiful GEP can be seen on the chart.
Gaps are more clearly visible in highly volatile assets that form small candles on the chart. Their frequent appearance is characteristic of the stock market and the metals market.
GAP as an analysis and trading tool
The formation of price hollows (GAPs) can be used in trading practice as a separate pattern or as a supporting tool in a trading system, the rules of which do not prohibit it. In the analysis of the market situation, the GAP is perfectly combined with any analytical tool. There are several variants of its use in trading, depending on the place and time of its formation. Famous and world-renowned traders also use it in different ways, everyone has his own view of the situation regarding the price gap.
There is also a basis that unites the different views - the boundaries formed by the GAP should be viewed as a price channel, bounded by significant price levels. By breaking one of them towards the second level, the price signals that it will not tolerate a "void" and will soon fill it. This event should be used when opening a position in the direction of the breakout.
What are the GAPs?
The model is classified by the size of the gap in price and its direction, allocating four categories:
- An ordinary GAP - it is characterized by a small gap, barely visible on the price chart and is insufficiently informative for technical analysis. Most often such a gap on the chart is quickly covered by a trend.
- The Gap Breakout is a more useful type of Gap, occurring at the opening of the market. It is characterized by the price breaking through trend levels and channel borders.
- Acceleration gap - such GAP is characterized by its abrupt formation on the accelerated trend, rapidly gaining strength.
- Gap depletion - places of its formation should be looked for near strong price landmarks.
The price always returns to the level where the GAP was formed, in order to fill the "market void" created by it.
Famous traders recommend
When they say "famous traders", they do not mean just successful traders, but people with deep knowledge of the specifics of the market, laws of its operation, and patterns in price movement.
John Murphy is a well-known trader, money manager, brilliant analyst, and author of many works devoted to trading. His trading experience is about 30 years.
J. Murphy believes that the result of market forecasting by means of GAPs depends on the place of their formation on the price chart, and also distinguishes four types of this candlestick pattern:
- Simple - its appearance is characteristic for the calm market, this kind of gap is not of interest for forecasting its further direction. Its formation on a specific asset indicates a small interest of players in this asset, so even a small amount of investment can contribute to its appearance. Analysts ignore this signal.
- On the Gap - In terms of potential profits, such a GAP is interesting. It appears in the final phase of the formation of a certain price pattern and may indicate a significant change in the market situation. It occurs less frequently, but it is closely related to almost all known patterns and is a confirmation of the signals from them. Its appearance often occurs against the background of growing trading volume and its market void is rarely, rarely or almost never overlapped by the price. Murphy derived his own pattern for this GAP - the higher the volume at its formation, the less likely it is to overlap the price in the long run.
- On the breakaway - it is characterized by formation along with the trend, it is often situated in its middle, several price gaps may appear at once. It is a signal to the continuation of the current trend even at small volumes of trade. We should count the points before the Gap formation and multiply the result by 2 to find the number of points the price will be able to pass before the reversal.
- On the flying out - it is formed in the final phase of the trend with the gaps of 2 and 3 types preceding it. Traders use it as a signal to open opposite deal when the price is in the range of its channel and rushes to its closing.
Jack Schwager is a trader best known for making accurate forecasts of price movements on the futures market. He is head of Fortune Group holding company, researches dynamics of hedge funds, conducts seminars on "Market Analytics".
J. Schwager, like J. Murphy, also distinguishes four types of GAP:
- Normal - not informative, recommends ignoring it.
- Gap on breakdown - it is formed when the price leaves a certain range. Schwager recommends it to be used as a strong trading signal, provided that this GAP does not overlap the price for several trading days.
- Acceleration Gap - formed in parallel with the acceleration of the trend and can be formed several times for several consecutive days.
- Exhaustion Gap - drawn at the final stage of a trend, it is used as a signal of an imminent change in the trend.
Many successful traders are excellent analysts, who are able to conduct a deep analysis of the market and give the most accurate quotes forecasts. You should listen to their recommendations.