Quite frequently, there are non-standard situations in the Forex market that could both bring substantial profit and a large loss. One of these situations is called “gap”. Many traders, particularly the beginners, ask themselves, whether it is worth trading in gap conditions and can a profit be earned from it. Traders Union experts were unable to find a definitive answer to this question in open sources. In order to find a trustworthy answer, the team of TU analysts conducted their own research and found out whether successful traders play the gap. This research will help traders, especially the beginners, borrow the experience of their more successful colleagues and use it in their trading.
The main goal is to obtain a trustworthy and unbiased answer to the question of the research. In order to reach this goal, the team of TU analysts conducted a survey among 2,200 successful Forex traders working with the brokers from the Top 10 of the TU rating. As a result of the conducted survey, the TU analysts obtained reliable and trustworthy data, based on the experience of successful traders and also determined whether it is worth trading when a gap occurs.
TU research also provides answers to the following questions:
What is a gap?
What types of gaps exist in the Forex market?
Why do gaps occur?
What kinds of risks need to be considered when trading in conditions of a gap?
The results obtained by the TU experts are based on reliable and unbiased data, studied in the course of the research. Therefore, the traders from all across the world will be able to apply them when building their trading strategies in the Forex market.
Forex is a global financial market for exchanging currencies. The participants of Forex trading include central banks of different countries, companies, top international businesses, commercial banks and private traders.
Forex broker is a company performing the functions of an intermediary between the buyer and the seller of currency in the Forex market.
Trade deposit Trade deposit means the funds deposited by a trader to his/her account with a Forex broker with the purpose of performing trading transactions.
Volatility is a term used to describe fluctuations of trading prices within a specified period of time. It is believed that the higher the range of price fluctuations, the higher the volatility.
Liquidity is an economic term denoting the capability to quickly buy or sell an asset at the price closest to the market price with minimum possible expenses.
Slippage is the difference between the expected price of a trade set by the trader and the price at which the trade is executed.
Spread is the difference between the best buy price and the best sell price in currency exchange.
Trading strategy is a set of rules and algorithms used for making decisions when trading in the Forex market. The trading strategies are based on either technical or fundamental analysis, and there are also combined trading strategies.
Timeframe is the amount of time for grouping quotations of a currency pair to create a minimum element of price traffic. The price movement is built from the minimum elements, most frequently bars.
Gap is a situation in the financial market, when the price of an asset moves sharply, creating the gap, after the previous timeframe closes and before opening of the one that follows. On a candle chart, the gap is seen as a break between two candles. Gap occurs, when the price rises or falls sharply.
Having reviewed the opinions on trading in gap conditions in the Forex market, published in the open sources (tradingview.com, finder.com, sc.squaredfinancial.com, dailypriceaction.com, dailyfx.com, investopedia.com and others), the team of TU experts established that there is no agreement of opinion on trading when a gap occurs in the Forex market in the open sources. Some experts believe that it is worth trading when a gap occurs in order to earn a big profit. Others claim that trading when a gap occurs carries extremely high, unjustified risks, and, therefore, it is necessary to stay ‘outside the market’ in such a situation.
TU experts have tasked themselves with finding out which opinion on the question of the research is shared by successful traders, trading in the Forex market via the brokers from the Top 10 of the TU rating, and also whether they play the gaps for successful trading.
At the beginning of the research, the team of TU analysts learned what a gap is and what types of gaps are there in the Forex market.
Gap is a ‘break’, a difference between the asset prices at the closure of one timeframe and before opening of the next timeframe. Most frequently, this situation occurs in the period between Forex market closure on Friday and its opening on Monday. If the difference between the price of closing on Friday and of opening on Monday is substantial, a gap is formed, namely the price turns out to be significantly higher or lower than the Friday price. This can be well seen on the chart – it shows a sharp jump of price and a break before it.
This happens because in the time when the market is inactive, namely over the weekend, a large number of buy or sell orders is accumulated, and when the market opens on the night from Sunday to Monday, these orders are executed simultaneously and create the gap. Due to the absence of demand/supply, participants of trading are forced to open positions at the actual prices, which are much higher or lower than the Friday evening prices. This does not happen always, only when there is a large excess of buy or sell orders accumulated over the weekend.
Most frequently, gaps occur when fundamental news on a currency pair or one of the currencies, its components, comes out at the time when such a currency pair is not traded (when the Forex market is closed). Sometimes, however, there are situations when a gap occurs in the middle of the trading period, caused by unexpected news (unexpected macroeconomic data, disasters, terrorist attacks, etc.), with the difference between the two quotations going as much as 5 times higher/lower than usual.
TU experts have noted the following pattern: when a gap occurs, the price often moves to close the gap. Based on the statistics, over 70% of all gaps in the Forex market are closed rather quickly. Closing the gap means that the price returns to the previous value before the gap occurred. This statistics applies to weekly gaps, as intraday gaps occur much less and are caused by strong news. Closing of such gaps can take several days or even weeks.
According to generally accepted classifications, there are the following types of gaps:
Common gap;
Breakaway gap;
Measuring gap;
Exhaustion gap.
Common gap
This type of gap appears on rather calm markets or in the middle of trading ranges. The appearance of this type of gap indicates that there is little interest on the part of the traders to this particular trading instrument. Even small purchases or sales in such a market can cause a gap. The majority of analysts ignore such signals.
Breakaway gap
Breakaway gap forms at the end of certain price movements and may indicate substantial market changes. This type of gap is registered in the majority of price figures, although it occurs rather rarely. However, if it does occur, the signal for purchase or sale considerably intensifies. Noteworthy, such price gaps are usually accompanied by substantial growth of trading volumes. Such gaps usually don’t close or don’t close fully. Also, the higher the volume when such a gap forms, the less probability that it will close later.
Measuring gap
Measuring gap forms within the current trend. Sometimes, several price gaps occur. This gap on the chart signals that the trend will continue as the market is moving along the path of the trend without any efforts and at relatively small volumes. The majority of gaps on Forex of this type form approximately in the middle of the trend. If you calculate how many pips the price moved before the gap occurred, you could predict how many pips are left before the turnaround.
Exhaustion gap
It is believed that the exhaustion gap occurs at the end of the trend. Usually it is preceded by measuring and breakaway gaps. Exhaustion gap can be used to open an opposite position in the market. For this, you need to wait until the price falls within the gap and starts closing it.
Note:
TU experts note that a gap is visible only on the types of the charts, where both the opening and the closing prices of a timeframe are shown simultaneously. Usually, these are Japanese candle or bar charts. On the broken line, Renko, Kagi and similar charts, the gaps are not visible.
In order to find an answer to the question of whether it is worth trading when a gap occurs in the Forex market, the team of TU analysts surveyed 2,200 successful traders. The respondents came from different parts of the world, trading with the brokers from the Top 10 of the TU rating. All surveyed traders have reported profitable trading for at least one year. The survey was conducted using the CAWI (Computer Assisted Web Interviewing) method. The non-sampling error of the survey with a confidence level of 95% is no more than 2%.
6.1. In terms of gender, the respondents were as follows:
76% — men;
24% — women.
Picture 6.1. Respondents by gender, %
6.2. The age groups are as follows:
40% of the respondents are aged 18-30;
37% — aged 30-45;
21% — aged 45-60;
2% of the respondents are older than 60.
Picture 6.2. Respondents by age, %
6.3. In terms of their trading experience, the composition of the respondents was as follows:
3% of the respondents have been trading on Forex for over 10 years;
24% — more than 5 years;
45% — from 3 to 5 years;
28% — from 1 to 3 years.
Picture 6.3. Respondents by Forex trading experience, %
6.4. The average monthly deposit growth for the last 6 months of the surveyed traders is as follows:
4% of the respondents have shown up to 15% average monthly deposit growth;
17% — up to 10%;
32% — up to 5%;
35% — up to 3%;
12% — up to 1%.
Picture 6.4. Average monthly return rate of successful traders, %
6.5. The responses of the respondents regarding their trading strategies were as follows:
51% use long-term strategies;
49% — short-term strategies.
Picture 6.5. Long-term vs short-term trading strategies, %
6.6 To the question “Do you trade when a gap occurs?” the responses were as follows:
Yes, I trade — 57%;
No, I don’t trade — 31%;
I trade sometimes — 12%.
| Trading when a gap occurs | Votes | % |
|---|---|---|
Yes, I trade |
1254 |
57% |
No, I don’t trade |
682 |
31% |
I trade sometimes |
264 |
12% |
Total |
2200 |
100% |
Table 6.1. Responses of the traders to the question of whether they trade when a gap occurs in the Forex market
Table 6.6. Trading when a gap occurs, %
6.7 Also, the respondents who trade (sometimes trade) when a gap occurs were asked about the level of the expected profit when playing the gap. The surveyed traders answered as follows:
821 (54%) respondents earn a profit that is higher than in usual conditions;
135 (9%) stated they earned an average profit that is lower than in usual conditions;
562 (37%) of the surveyed traders earn a profit at the same level as in usual conditions.
| Profit on the trades when a gap occurs | Votes | % |
|---|---|---|
Higher than in usual conditions |
821 |
54% |
Lower than in usual conditions |
135 |
9% |
At the same level as in usual conditions |
562 |
37% |
Total |
1518 |
100% |
Table 6.2. Responses to the question about the level of the expected profit when playing the gap
Picture 6.7. Average return on trades when playing the gap, %
(*) Survey criteria:
Survey audience: Forex traders of the TU community aged 18 and older trading with the brokers from the TOP 10 list of TU rating.
The sample is representative in terms of age, gender and Forex trading experience.
Sample number: 2,200 respondents.
Survey method: CAWI (Computer Assisted Web Interviewing).
Non-sampling error of the study with a confidence level 0.95: no more than 2%.
Period of survey: June 9-11, 2023.
Based on the obtained data, TU experts have come to the following conclusions:
The vast majority of successful traders surveyed by the TU analysts use or partially use trading when a gap occurs in their trading strategies, namely 69% of respondents.
Traders who use long-term trading strategies play the gap more often than traders who prefer short-term trading strategies.
Experienced traders play the gap much more often than their less experienced colleagues.
The results obtained in the course of the research do not depend on gender and age of the traders. The majority of men and women, regardless of their age, agree that trading when a gap occurs can bring profit in the Forex market.
For more detailed information on trading when a gap occurs, download the full version of the research conducted by our team.
There are many different situations in the Forex market, including gaps. This is not a very frequent phenomenon in the Forex market, but a rather important one for building a profitable trading strategy.
In order to trade with a profit when a gap occurs, the following is necessary:
to evaluate the risks that a gap (price break) carries correctly.
to determine the type of the gap correctly.
to trade with an understanding that not all gaps in the Forex market close. Accordingly, it is necessary to use Stop Loss when trading in order to avoid the loss of a large share of the trade deposit.
After building a trading strategy, taking into account the aforementioned factors, it is necessary to thoroughly test it using a demo account or a real trading account using minimum trading lots and leverage. Follow this rule and trading when a gap occurs in the Forex market will bring you stable and high profit.
Antony Robertson
Traders Union’s analyst trader
Background info.
TU research is a result of many days of hard work by our experts, who collected, processed and analyzed a huge amount of information and opinions on the gap trading in the Forex market. Our data are also largely based on the success stories of real traders, who work with TU, which confirms their objectivity and impartiality.
Our research is of a charitable nature and was created at the expense of Traders Union with the objective of increasing financial literacy of Internet users and increasing the percentage of successful transactions among traders. If you enjoyed our research and found it useful, please share it with others.
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
Forex trading, short for foreign exchange trading, is the practice of buying and selling currencies in the global foreign exchange market with the aim of profiting from fluctuations in exchange rates. Traders speculate on whether one currency will rise or fall in value relative to another currency and make trading decisions accordingly.
Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.
Mikhail Vnuchkov joined Traders Union as an author in 2020. He began his professional career as a journalist-observer at a small online financial publication, where he covered global economic events and discussed their impact on the segment of financial investment, including investor income. With five years of experience in finance, Mikhail joined Traders Union team, where he is in charge of forming the pool of latest news for traders, who trade stocks, cryptocurrencies, Forex instruments and fixed income.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.
