What is a GAP?
A price gap or "GAP" in the forex market refers to when the price opens at a significantly different level from the previous closing price. This typically results from major news, economic indicators, or political events that occur while the market is closed.
Types of Gaps and Their Causes
Forex traders encounter several types of gaps:
1. Market Opening Gap:
The forex market is closed on weekends (Saturday and Sunday). During this time, many important events and news can occur worldwide. When the market reopens on Monday:
The price opens directly at a significantly higher or lower level than Friday's closing price.
No trading occurs between these two points, creating a "GAP" on the chart.
This type of GAP commonly results from a sudden disparity in supply and demand, unexpected political announcements, or serious economic indicators.
2. High Volume Gap:
This type of GAP occurs when trading volume in the market suddenly increases, indicating a strong trend and large orders in the market.
This GAP usually represents active participation by many traders in a particular direction and is less likely to be filled quickly compared to other GAPs. This is because the strong momentum tends to continue pushing the market in the direction of the GAP.
This GAP also often occurs when high-impact news is released. When significant news (e.g., central bank interest rate decisions, unemployment rates, political statements) is broadcast:
The exchange rate moves sharply
Trading volume increases dramatically
The combination of trading activity and market reaction to new information creates conditions for a high-volume GAP.
How GAPs Affect Prop Trading
GAPs affect prop trading strategies and performance in the following ways:
SL/TP (Stop Loss / Take Profit) orders may not be executed at the desired price when a GAP occurs. This can result in increased losses that might exceed your daily or total maximum loss limits.
Limit/Stop Orders may not be executed at all or may be executed at a price different from the desired level when a GAP occurs.
During significant gaps, market liquidity may decrease dramatically, making it temporarily impossible to execute trades at reasonable prices. This can prevent you from entering planned positions or executing your trading strategy as intended, potentially missing profitable opportunities or being unable to manage risk effectively