Gap: What It Is in Simple Terms

A gap is a break on the chart, when price opens noticeably higher or lower than the previous close, with no trades between those levels. On forex, gaps are rarer than on stocks (the market runs almost around the clock), but it is important to understand them so you are not caught off guard when carrying positions through weekends or important events.

Where Gaps Come From

Most often a gap appears at the market open after the weekend: news comes out over Saturday and Sunday, and the quote catches up with it in a jump on Monday, because there was almost no trading over the weekend. The second source is strong unexpected events (emergency central bank decisions, geopolitical shocks), when price jumps over levels too fast for a smooth move. A gap is essentially the market's reaction to information accumulated during a period when trading was not happening or was very thin.

Types of Gaps

Roughly, several types are distinguished. A common gap often closes quickly (price returns to the previous close level). A breakaway gap occurs on exiting a range and means price has left the level and is not coming back. An exhaustion gap appears at the tail end of a strong move and can foreshadow a reversal. The problem is that a gap's type can usually be reliably identified only in hindsight; in the moment it is a hypothesis, not a fact.

Why a Gap Is Dangerous

A gap is a zone where a stop-loss can execute at a worse price than specified. If the market opened with a break beyond your stop, the order fills not at the stop price but at the first available price after the gap; this is slippage through the break, and it can be significant. So carrying a large position through the weekend without accounting for gap risk is risky: Monday may open far from where you expected, and the loss turns out larger than planned.

Gap Strategies and Their Limits

There are gap-closing strategies (betting on price returning to the close level), but this is not a free signal: some gaps, especially breakaway ones, do not close at all but move further. Trading gaps as a guaranteed regularity is dangerous. It is wiser to use an understanding of gaps in risk management rather than build all of your trading on them in hope of predictable behavior.

Practical Meaning

The practical approach to gaps is first of all protection. Account for gap risk when carrying positions through the weekend and before major events: it may be worth closing or reducing the position, or widening the stop with the understanding that it can trigger with slippage. Do not count on a gap necessarily closing. If you trade gaps deliberately, do it as a separate strategy with clear rules and stops. A gap is a break caused by information accumulated outside of trading; understanding its nature and risks protects the account better than trying to guess whether it will close. For most traders, the main thing about gaps is managing the risk of carrying positions, not speculating on the breaks themselves.

This material is for educational purposes and is not individual investment advice.