GEO (english GAP -. Gap) - is a special sequence of quotations in which, between the closing price of the previous candle and the opening price the next, a significant gap is formed within which the sale was not carried out at all. Most often it is shown on the chart easily discernible visual gap between the two candles (in the example below "empty area" is perfectly visible).
But there are situations where a gap may develop within one candle and thus not create a visual discontinuity. This is possible when working on large timeframes, when one candle or bar formed quite a long time.
In the example below, comparing D1 timeframes (one candle - one day) and W1 of (one candle - one week). At the lower slot gap is clearly visible down, and at the higher it is absent. In the second case within a week can take place any number of gaps, but they will be included into a single candle. This feature can be shown by comparing the time intervals of any size.
The process of the emergence of the gap.
Mechanisms of gaps in general logically simple but reliably tell what goes on inside specifically given situation, it is not always possible. The main element that lies at the heart of any gap, is the fact that a strong change in the supply and demand ratio. Approximate structure of the formation of a gap up can be described as follows:
1. quietly growing market free to buy the currency at a price 1.1000, 1.1001, 1.1002 and so on. These prices form the sellers (supply) that are willing to sell this currency. In this market there is sufficient both sellers and buyers.
2. There is a time when the demand for the currency sharply (at one time) increases. This can occur for many reasons, the main of which will be described below.
3. As the market grows and most prefer to buy rather than sell, formed a kind of shortage of sellers. As a result of high demand a few sellers form a new value of the currency is more profitable for themselves. For example, they change their currency offer price 1.1003 1.1103 at once, because they understand that the situation is favorable to the market demand is high, and even at that price there are buyers. And the gap is formed, which is the only price (the first best seller to the buyer bid), for which you can buy the currency to be 1.1103 and above.
4. As a result, customers simply have no choice but to buy at the price at which the offer, as willing to sell cheaper there.
Causes.
As noted above, the trigger for the emergence of the gap is a sharp change in the supply and demand ratio. The change can be either cumulative (accumulated), and a momentary. There are several types of the gap depending on the most common causes.
GEO News - the most common type, is caused by the release of a very important news for the market, which seriously impairs the evaluation of the currency or stocks. For example, gaps are often formed in the publication of news on interest rates.
GEO due to force majeure events - here can be attributed all the factors that are difficult or impossible to take into account in trade. Serious natural disasters, technological disasters or terrorist attacks - all this and more can have a strong impact on the market.
GEO sessions and timeframes - in the first place is the cumulative gaps, which are formed at the beginning of the trading week after the holidays, or as a result of accumulation of applications during the time when the market is not functioning. It is also sometimes possible to observe the gap that occurs at the time of the closing of a large time interval (for example, month or year), as the major players are investing, based primarily on the long term and use the appropriate timeframes. In this case, the conclusion of large transactions are made only after the closure of the supporting spark that can cause significant changes in the market.
Trend GEO - a rare type of gap, the appearance of which is due to the specifics of the mass analysis of the current players in the market. Many traders use technical analysis of such rules as the breakdown or rebound from the level. And if the level is very strong, obvious, then, most likely, most will take the same decision, and thus form a large short-term demand, which could well serve as a reason for the gap.
Recommendation.
Gaps are very noticeable and significant event for the market, since at one point seriously change its structure, volatility, price levels, the ratio of buyers and sellers. It changes the mood of market participants, so it can fully replaced by the current trend. On the other hand, the gap in the direction of the trend is able to give even more power.
Whatever it was, gaps affect all traders, and it does not matter, they consider them or not. Drinking it can be summed up in three types of traders reactions.
Active response - in technical analysis there is a rule (to some extent supported by statistics), according to which most of the gaps close. Those. the price is likely to "fill" the gap, return to the initial value in a short time. Traders are trying to use this fact and immediately after a gap open trade in the opposite direction to it. Note that this rule is not an axiom, and as any trading method requires some experience and knowledge for a successful application.
Passive reaction - most traders tend to avoid potentially unpredictable situations. Therefore restrict their trade, for example, before the release of news or other events that may lead to gepu.
Forced position - this is often the worst option. Trader becomes accidentally involved in this event, and, most often, suffering losses to open a gap before the transaction. A special place is occupied by the pending orders set at the level of prices, which just went on break. They open at a price that is radically different from the required, thereby forming a deal with unfavorable conditions. For example, a pending order to buy at the asking price 1.1000 activated on time, but technically could be opened only at the first available price 1.1100, which is not profitable trader.
In any case, you must take into account the gaps and opportunities to pay attention to a situation where the probability of their occurrence is particularly high. Of course, an experienced trader is able to benefit from this event, but the beginning is better to try to stay in the side, as if unskillful actions such strong movements can in seconds deprive entire deposit.
