A forex gap usually refers to a difference of the price of a currency pair on the start of the new trading week compared to price at the previous week’s closing. However it can happen anytime as you will find out more below.
An example would be
Friday close: EUR/USD 1.1400
Monday open: EUR/USD 1.1500
This is a forex gap of 100 pips.
The currency exchange market similarly to other markets, is all about the different participants’ expectation of value. “Gaps” are simply a change of expectations beyond a single pip. In your charts, it shows up as a “disconnected” progression of candles.
Therefore forex gaps can possibly happen at anytime of the day as long as there is a disconnect of the price of the currency pair.
For weekend gaps while most of the retail brokers are closed for the weekend, financial / economic events may still take place or develop. For example a Group of 7 financial meeting is called to discuss the current state of financial issues on a Saturday. Any unexpected result of this meeting may cause expectations to change. As the retail broker is closed for the weekend, the exchange rate will not be updated. When trading resumes on Monday, the updated chart will reflect the new expectations and a forex gap is seen.
Another example is of an event with so much impact (think like Brexit cancelation) that investors suddenly have a much different expectation of value, resulting in a “jump” of bid/ask rates.
Risks of forex gaps
As of all markets, no one can predict what happens next with 100% certainty. Forex gaps can happen any time and result in margin calls, especially if one has risked excessively. Therefore you should practice proper money management at all times.
Besides the risk of margin calls, there is also a lesser known but in my opinion a riskier situation that may arise from a forex gap. That would be a negative balance.
I personally had three margin calls before and one of which was due to a gap. The gap was so big that it wiped my entire account and went into negative. ( There was no way for the broker to close my positions over the weekend ) You should always consider carefully before leaving positions open over the weekend. One should always keep a lookout for economic events scheduled for the weekend.
How to trade forex gaps?
You may have heard of people who bet and are rather confident that forex gaps would retract and fill the gap.
When a forex gap closes, it means that the price has gone back to the level it was before the gap. One possible reason for a closure will be that the forex gap may have happened because of a knee jerk reaction to an event. As the initial surprise surrounding the event fades, the market may decide that it is not significant. Normal economic forces then take over and bring the price to where it was before the event. Do note however that there is no assurance of a 100% certainty that forex gaps will close. The sentiment may build on and bring the price further away.
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