What is a gap in forex?
A gap shows up on a price chart where the market has moved from one level to another with little or no trading in between. In forex this typically looks like a candlestick whose low is above the high of the previous candle (a gap up) or whose high is below the previous candle’s low (a gap down). On longer timeframes a gap leaves a visible blank between bars; on very short timeframes you can also see tiny intraday gaps after big news.
In practical terms a gap means the next traded price after a break in continuity is materially different from the last traded price. For example, if EUR/USD closed on Friday at 1.1000 and then opens on Sunday evening at 1.1050, the chart will show a 50‑pip gap. Because the major interbank forex market is open 24 hours a day from Sunday evening to Friday evening, most forex gaps appear at the weekend open or after major events that interrupt normal liquidity.
Why gaps form in the forex market
Gaps are the market’s response to a sudden change in the balance between buyers and sellers. Several common situations create that change.
When important economic data or central bank news arrives outside of active trading hours, traders reassess positions before trading resumes and the first quotes can jump. Geopolitical events, unexpected corporate news or sudden risk‑off/risk‑on sentiment shifts work the same way. Weekend gaps are another familiar example: information that emerges while the market is closed can change prices by the time markets reopen.
Liquidity also matters. During thin hours — for example around public holidays, or when one major trading centre is closed — there are fewer counterparties ready to trade. A large order placed into a thin market can “skip” price levels and produce a gap. Finally, technical breaks at big support or resistance levels can trigger stop orders and cascading flow that widens the gap if liquidity is limited.
Types of gaps traders watch for
Traders and chartists usually divide gaps into several types because each carries different implications for what might follow.
A common gap occurs inside sideways ranges and usually has no strong fundamental backing; these gaps tend to get filled quickly as price returns to the prior range. A breakaway gap appears when price leaves a consolidation or a chart pattern and often signals the start of a new trend; a breakaway gap is more likely to hold and become a new reference for support or resistance. A continuation or runaway gap appears in the middle of an established trend and indicates renewed momentum in the same direction. An exhaustion gap forms near the end of a long move and can signal that momentum is spent; exhaustion gaps often reverse or get filled quickly. There are also rarer patterns such as island reversals, where price gaps in one direction, trades in an isolated range, then gaps back the other way, leaving an “island” of price.
These labels are descriptive — the same gap can behave differently depending on broader context. A gap that looks like a breakaway in one pair or timeframe might function as an exhaustion gap when you step back and look at a higher timeframe or the underlying fundamentals.
How traders interpret and trade gaps
Traders use gaps in different ways depending on the gap type, time horizon and risk tolerance. Two broad approaches are common: trading the continuation (riding the gap) or trading the fill (fading the gap).
Trading in the direction of the gap works when a gap is supported by strong fundamentals or volume. If a currency pair gaps higher after a surprise central bank decision that materially changes interest rate expectations, momentum traders may wait for a short consolidation and enter in the direction of the gap, using the gap area as a stop reference.
Trading the fill, sometimes called fading the gap, assumes price will retrace to close the empty space. This approach suits common or exhaustion gaps where there is little follow‑through. A typical tactic is to wait for a sign of weakness after a gap up — a rejection candle, failing momentum, or a lack of volume — and then enter a counter‑trend trade targeting the prior close.
Whatever the approach, successful traders usually do three things before putting on a position: they assess context (trend, support/resistance, macro backdrop), check for confirming evidence such as volume or price structure, and plan risk — entry, stop and realistic profit target. For example, a trader may see a weekend gap in GBP/USD after political news, confirm that the gap overlaps a major resistance level, wait for the first hour to show whether the market accepts the new price, then enter with a stop that accounts for potential slippage.
Practical example
Imagine USD/JPY closed Friday at 141.50. Over the weekend a surprise announcement increases demand for the dollar and the pair opens Sunday at 142.20. That 70‑pip gap is visible on the daily chart. If this gap appears while price also breaks a multi‑week consolidation and trading volume (or tick activity) is strong, a trader might treat it as a breakaway gap and look for continuation signals. By contrast, if there is little supporting flow and the price struggles to make new highs, a different trader might wait for a reversal candle and target the Friday close at 141.50, accepting the risk that a gap can remain unfilled.
Execution issues: slippage and stop orders
Gaps bring execution risk. A stop‑loss placed inside a gap can be filled at a worse price than expected because there are no trades at the intermediate prices. This slippage can increase losses, especially with leveraged positions. Limit orders may also be missed if the market bypasses the limit level. For these reasons traders often widen stops around known gap risk (weekends, overnight news) or avoid holding positions through times when gaps are likely.
A step‑by‑step approach for beginners
Start by scanning charts for visible gaps and note the time and reason — was there an economic release or a weekend event? Compare the gap to the higher‑timeframe structure: does it break a consolidation, or is it inside a range? Look at volume or tick data where available to see if the gap had follow‑through. Wait for a confirmation candle before entering and size the position so a stop loss represents a small, predetermined percentage of your capital. Practice any gap strategy on a demo account before risking real money.
Risks and caveats
Gaps are not reliable signals by themselves. They can be caused by transient market noise and are often followed by volatile, unpredictable price action. Slippage can work against you when stops are triggered inside a gap, and leverage magnifies both gains and losses. Weekend gaps in forex are relatively common but their drivers can be complex — political developments, macro surprises and changes in liquidity all play a role — so it’s risky to trade based solely on the presence of a gap. This article does not provide personalized advice; if you trade gaps, use sound risk management and consider testing strategies on a demo account first. Always remember that trading carries risk and you can lose money.
Key takeaways
- A gap is a jump in price with little or no trading between two levels; in forex gaps most often appear at the weekend open or after major news.
- Gaps are classified by context: common, breakaway, continuation (runaway), exhaustion, and island reversals, and each suggests a different follow‑up probability.
- Traders either follow the gap (expect continuation) or fade it (expect a fill); successful use depends on context, volume, confirmation and strict risk management.
- Trading gaps involves execution risk such as slippage and requires conservative position sizing; trading carries risk and this is not personalized advice.
References
- https://mondfx.com/what-is-a-gap-in-forex/
- https://www.tastyfx.com/news/what-is-gapping–230727/
- https://capital.com/en-int/learn/trading-strategies/gap-trading
- https://www.forex.com/en-us/trading-academy/courses/managing-risk/market-gaps-and-slippage/
- https://blueberrymarkets.com/academy/what-is-gap-trading/
- https://www.oanda.com/us-en/trade-tap-blog/trading-knowledge/understanding-and-trading-price-gaps-in-forex/