In the forex market, gaps are usually formed over the weekend when the market is closed. They also occure during economic events and news releases on lower time frame charts.
To trade gaps using supply and demand, you start by identifying whether you have a professional or a novice gap, then trade accordingly using supply and demand trading.
In this article, I’ll explain to you what is a gap, the difference between pro and novice gaps, and finally, how to trade gaps using supply and demand strategy.
What is a gap in forex?
Basically, a gap is defined as an empty space that occurs between two candles. It is a sharp break in price where no trading takes place.
In forex, a gap is formed over the weekend as the market is closed. When the market resumes trading on Sunday evening, a gap can be formed as the market processes what happened during the weekend.
Compared to the stock market, gaps are not that frequent in forex. In stocks, there are too many gaps occuring everyday due to earning reports and other financial events. In forex, gaps are formed over the weekend and during big major economic data releases.
Here’s what a gap looks like on a forex chart:
On the chart we have a big gap that has formed on Sunday evening. Price jumped all the way down from 78.69 to 78.48 forming a big gap down.
When the gap is formed above the previous close, it’s called a gap up. And when the gap is formed below the previous close, it’s called a gap down.
Professional and novice gaps
In forex, we have two types of gaps: professional and novice gaps.
The pofessional gap is formed in the opposite direction of the current trend.
The novice gap is formed in the same direction of the current trend.
On the chart, the novice gap occured during an uptrend, price formed a gap in the same direction of the uptrend. In the professional gap, the trend was up and price formed a gap in the opposite direction of the trend.
How to trade gaps using supply and demand
To trade gaps using supply and demand, you start by identifying the types of gaps you have on the chart.
Do you have a novice or a professional gap?
A professional gap signals a continuation in the same direction of the gap. Whereas a novice gap signals a reversal.
In supply and demand, a professional gap gives us an early signal that a supply or demand zone is forming. A novice gap occurs after the supply or demand zone is formed.
1. Novice gaps
In this example, price created a novice gap near the daily supply zone. To trade this novice gap, you need to look for a supply zone at which price is gapping up. Once you find the supply zone, you can go short after the price tests the zone using a market order.
The novice gap signals a potential reversal in the opposite direction. As you can see on the chart below, price formed a novice gap, tested the supply zone and changed direction to the downside.
Same thing happened here, a novice gap is created in the same direction of the trend (uptrend), you look to the left to find a supply zone and then you place a market order to go short.
2. Professional gaps
A pro gap is formed in the opposite direction of the trend and it signals a new market imbalance: supply or demand imbalance.
In this example, the pro gap is used to draw the demand zone as price gapped up in the opposite direction of the downtrend. To trade pro gaps, you place a limit order at the zone and wait for price to retrace back to the zone and trigger your limit order.
When a pro gap is formed after a rally in price, you use the gap to draw your supply zone and place a limit order to short the market when price retraces back up to the zone.
Gaps are very strong and reliable chart patterns to trade. In forex market, gaps occure on Sundays at the market open or during news releases. In order to trade gaps using supply and demand, you identify whether you have a professional or a novice gap, then all is left to do is draw your supply and demand zones and place your orders.
A professional gap gives an early signal of a supply or demand imbalance, whereas a novice gap comes later on as price retraces back to the zone for a test.