Gaps in Forex Trading

The Forex market is available for trading 24/5, meaning it opens on Mondays and closes over the weekend. It is the biggest and most liquid market in the world, with trillions and trillions of dollars traded every single day. Because of this high liquidity, gaps are not that common on the Forex market. Gaps do not appear during the trading week, except when there is no market.

Such a thing happened when the Swiss National Bank (SNB) dropped the peg on the EURCHF cross pair. For years, the EURCHF pair was pegged to the 1.20 level. This meant that the central bank would automatically sell CHF against the EUR when the market approached that level.

However, in January 2015, out of the blue, the SNB announced it cannot hold the peg anymore. In a blink of an eye, there were no more quotes on the CHF pairs. Not only the EURCHF clipped lower, but also USDCHF, GBPCHF, and so on. There was no market for the Swiss pairs anymore, and a gap formed during the trading day.

This was unprecedented and it is unlikely to happen again. I mean, that event almost changed the way the industry functioned and brought many retail traders out of the trading arena.

In normal conditions, gaps are possible only over the weekend. Even though the market is closed over the weekend, a lot of important events take place: referendums, elections, geopolitical events, G20 meetings, Chinese data that is typically released on Sundays, and so on.

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All these events may result in the market opening with a gap on Monday. On the currency market, not all currency pairs open with the same gap. It depends very much on the type of the news that caused a gap. When the ECB (European Central Bank) decided to confiscate big deposits in Cyprus to help local banks, it was a Euro related move. As a consequence, the EURUSD pair and other Euro pairs moved aggressively lower. That gap remained in history as the “Cyprus gap”.

The Western world’s approach to gaps is that they are mandatory to close. Some trading theories call for them to close in the same day. This is why when the market opens with a gap, traders will position in the other direction and aggressively will add new and new positions in that direction. This is true to some extent, but keep in mind that gaps are not mandatory to close the same day.

Others look for gaps to close by the end of the week. So, if a gap forms on Monday, by the time Friday comes, it should be closed. While this is happening most of the times, it is not a general rule, and definitely, it is not a rule of thumb.

Gaps appear on a forex demo account too. There is absolutely no difference between a demo and a live account, with the exception that sometimes the execution is different on a live account, depending on the type of the trading account one has. For example, in an ECN (Electronic Communication Network) account, the execution and slippage are different than in a regular dealing desk account.

There are gaps that are still open. If you look at the EURUSD descent from the 1.40 level when the ECB (European Central Bank) started to cut the rates and to easy the monetary policy, you’ll see that there is one open gap at around the 1.20 level. If you trade the Forex market with the idea that all gaps must be open and you bought the EURUSD after it kept moving to the downside, it means now you’re in big trouble.

I’m not saying that the gap is not going to close eventually. Only that now, more than three years later, it is still opening. This should be a good example for anyone claiming the gaps must close by the time the trading day or trading week ends.