When a forex pair opens higher or lower than the previous day’s closing price, the term used to define it is gapping. There are primarily four types of gaps-
- Common gaps- They are also called trading gaps, occur frequently and have insignificant volumes. These gaps typically fill in a few days and thereon could move in any direction. Common gaps generally do not provide trading opportunities.
- Breakaway gaps- These occur in the opposite direction of an ongoing trend and if complemented with heavy volumes, signal a price reversal. Go long on the FX pair if the breakaway gap occurs after a downtrend and short the pair if the gap formation occurs after an uptrend.
- Runaway gaps- These occur during an ongoing trend and if accompanied by volumes, signal a continuation in the existing trend. Unlike common gaps, runaway gaps do not fill immediately. Long the forex pair if you notice a gap during an uptrend and short the pair if the gap occurs in a downtrend.
- Exhaustion gaps- These typically occur towards the end of a trend as the forex pair makes a final bid to push higher or lower before reversing. If an exhaustion gap forms after a long uptrend, short the pair after it closes the gap on the opposite side of the bullish trend and if the gap forms after a long downtrend, long the FX pair after the gap closes on the opposite side of the bearish trend.