The market sometimes does not rise or fall smoothly, but makes an unexpected jump that leaves a visible gap on the chart. These empty spaces, known by the professional term price gaps, are among the most distinctive technical phenomena in the field of trading. On the one hand, they represent an important warning, but at the same time they open up room for the implementation of specific trading strategies.
In order to understand the very essence of how a price gap arises, we must look at the basic mechanics of matching buy and sell orders. This phenomenon occurs at the moment when a massive volume of new orders suddenly enters the market, causing a sharp shift in the balance between demand and supply.
Since there are no opposing orders in the narrow price range between the previous closing price and the new opening price, the chart simply skips this range. The result is a visual gap, which signals that the market had to immediately reassess the value of the given asset under the influence of new, previously unpriced information. This phenomenon occurs most often at the opening of the main trading hours, when the market reacts to events processed outside opening hours.
Weekend gaps
A specific and closely watched type, both in technical analysis and in risk management, are gaps that form during the interruption of trading between Friday evening and Monday morning. Although financial markets are closed for ordinary retail traders over the weekend, global political and macroeconomic developments do not stop.
If unexpected geopolitical events or significant economic statements occur during Saturday or Sunday, large institutional investors react to them immediately after the first Asian exchanges open. The accumulated volume of orders then causes Monday’s opening price to be significantly higher or lower than Friday’s closing value, which becomes a regular phenomenon especially on the currency market and on the stock index market.
How to identify them correctly?
Identifying the correct type of gap is crucial for a correct market assessment, because each gap carries different information about the probable direction of the price. Instead of looking for a universal pattern, traders distinguish 4 basic situations:
Common gap: It arises mainly with low trading volume, most often at a time when the price is moving sideways. From the perspective of technical analysis, it has no major strategic significance and the market usually closes it very quickly.
Breakaway gap: It appears at moments when the price sharply breaks through an important support or resistance level. For traders, it is a strong signal of the beginning of a new, long-term trend, accompanied by high trading volumes.
Runaway gap: It forms in the middle of an already developing and strong trend. This phenomenon confirms the continuing dominance of buyers or sellers and signals that the trend still has enough strength to reach new levels.
Exhaustion gap: It arises at the very end of a long-term trend. Unlike a continuation gap, it warns of an overheated market and predicts an imminent reversal in the direction of the price, as the original buying or selling power has been exhausted.
The phenomenon of filling windows: Why the market seeks lost equilibrium
There is a frequently repeated rule among traders that every market gap should sooner or later be filled, which in practice means that the price returns back into the empty range and closes the imaginary window. This psychological phenomenon stems from the fact that institutional players try to retroactively fill their unrealized orders at the original, more favorable prices.
While common gaps are filled within several hours or days, strong breakaway gaps may remain open for entire months or even years, as the market, under the influence of strong fundamentals, continues in the new trend without any return.
Practical use in trading and hidden risks
Successfully incorporating gaps into a trading plan requires not only technical skill, but above all strict risk management. Traders most often use strategies focused on trading toward the filling of the gap, or, conversely, they enter positions in the direction of a strong breakaway gap with the expectation of a long-term trend.
Global financial markets are undergoing a significant transformation after a longer period of uncertainty. The period of relative slowdown, which was characterized by high inflation and geopolitical tension, is being replaced by a visible recovery in the area of initial public offerings (IPOs). Companies that had been waiting on the sidelines for many months are beginning to enter the public market en masse, which is also confirmed by the growing volume of total capital raised. This trend signals that confidence is returning to stock exchange floors not only from company management teams, but above all from major institutional investors, who are once again looking for opportunities to appreciate capital in more dynamic assets.
Les mer →Raw market data coming from an exchange is essentially unreadable to the human eye. It is a continuous stream of numbers in which hundreds of executed orders, their exact time, price, and volume are recorded every second. In order to find logic in this chaos, we need to apply a filter to the data – a market chart. However, the choice of this filter is not merely a matter of aesthetics or personal taste. Each type of price display processes raw information differently.
Les mer →