GAPS, or gaps, in the world of forex trading refer to areas on a chart where no transactions have occurred. It is important for a trader to have a good understanding of this concept. GAPS are formed when no transactions occur for various reasons, such as sudden spikes in demand or supply.
GAPS can have several types, each reflecting specific market conditions and providing clues about the direction of future price movements.
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Here are the common types of GAPS in forex trading:
1. Common GAPS
- Common GAPS are the type of GAPS that occur frequently. They are formed when GAPS are quickly closed after they are formed. An example of Common GAPS is closing windows, where GAPS are closed shortly after formation. These GAPS usually occur when prices move within a certain price range and then experience pressure to move.
2. Breakaway GAPS
- Breakaway GAPS occur when prices break through a trading range or a strongly held area. This indicates a significant change in market conditions. Breakaway GAPS can provide confirmation of the direction of future price movements after prices exit the trading range.
3. Runaway GAPS
- Runaway GAPS indicate strong pressure in price movements. They occur when prices are sharply moving in a certain direction. Runaway GAPS can be an indication of how long a trend will continue. This theory suggests that the size of these GAPS is half of the price movement.
4. Exhaustion GAPS
- Exhaustion GAPS occur when prices approach the end of a trend. They indicate that the momentum of price movements is starting to weaken, and the trend may soon reverse. Exhaustion GAPS are signals that the ongoing trend is likely to end soon.
In forex trading, understanding the types of GAPS and how they are formed can help traders make better decisions. However, it is important to remember that GAPS are natural phenomena in the market and do not always provide accurate signals. Traders should use comprehensive analysis and not solely rely on GAPS alone in making trading decisions.
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