Gaps in Patterns in Technical Analysis for Forex CFD Trading

Gaps are spaces on a chart where no trading activity has taken place, representing a sharp move in price. In the stock market, they are common due to overnight news or events affecting a stock’s price before the next opening. While less prevalent in the Forex market due to its 24/5 operation, gaps can still occur after weekends or major unforeseen events. Understanding gaps is crucial as they can provide insight into potential future price movements.

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Gap Patterns in Trading

A gap is defined by the price jump between the close of one period and the open of the next, without any trading activity in between.

Types of Gaps

• Common Gaps:

These are not associated with any significant news event and are generally filled quickly. They're a result of normal price fluctuations and might not signal any major change in trend.

• Breakaway Gaps:

Occur at the beginning of a new trend, often after a key news announcement or a significant event. This type of gap signals the start of a new movement and might not be filled for a long time, if ever.

• Runaway (or Continuation) Gaps:

These gaps happen in the middle of a price trend and signal the continuation of the current trend. They're usually accompanied by high volume and can be a strong indication of market sentiment.

• Exhaustion Gaps:

Occurring towards the end of a price trend, exhaustion gaps signal that a trend is nearing its end and a reversal might be imminent. This is typically the last push before prices start to move in the opposite direction.

Applications:

• Entry & Exit Points with Gaps:

Gaps can provide clues for potential entry or exit points. For instance, a breakaway gap might offer a good entry point into a new trend, while an exhaustion gap could be an indication to exit or even reverse a position.

• Setting Stop-losses:

The opposite side of a gap can serve as a reference point for setting stop-loss orders. If a gap is genuinely a continuation or breakaway gap, the price shouldn't return to the pre-gap levels.

Considerations and Limitations:

• Gap Fill:

Prices often move back to fill the gap, but not always. Understanding the type and cause of the gap is crucial to predict whether it will be filled.

• Volume Confirmation:

A gap accompanied by significant volume often provides stronger confirmation about its type and potential longevity.

• Forex Specifics:

In Forex, gaps are rarer due to the 24/5 market operation. When they do occur, they carry significant importance, often driven by weekend news or unexpected global events.

Variations:

• Island Reversal:

This is a situation where a gap is followed by a short price movement and then another gap in the opposite direction. This leaves a range of prices isolated or "stranded," resembling an island. It's a strong reversal signal.

Historical Context:

Gaps have been observed and analyzed in various financial markets for decades. They’re often viewed as strong indicators of market sentiment, especially when backed by volume and other confirmatory signals.

Conclusion:

While gaps might be less common in Forex CFD trading due to the continuous nature of currency markets, when they do appear, they can provide significant trading opportunities. Recognizing the type of gap and understanding its implications are essential for making informed trading decisions. As always, gaps should be interpreted in conjunction with other technical analysis tools and within the context of a comprehensive trading strategy.

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