Traders often notice a visible break on a price chart where the closing price of one candle differs significantly from the opening price of the next bar. This is not a mystery—it’s a common market phenomenon known as a gap.
In this article, we’ll explain what a gap is in trading, how it forms, and whether—and how—you can profit from it.
Contents
- What Is a Gap?
- How Gaps Form
- Types of Gaps in Forex
- How to Trade Gaps
- Dividend Gap in the Stock Market
- Weekly Gap Trading Strategy: “Fill the Gap”
What Is a Gap—In Simple Terms
A gap in trading (from English “gap”) is a visible price discontinuity—or “break”—on a trading chart, occurring when prices change rapidly and sharply.
In simple terms, a gap appears on Forex or stock charts as a strong, sudden price jump in one direction, creating a noticeable void between the close of one period and the open of the next. Gaps are only visible when using “bar” or “Japanese candlestick” chart modes.
From an economic perspective, a gap reflects strong imbalance between buyers and sellers—when no opposing orders remain to match incoming demand or supply, forcing price to “drop” or “jump” sharply to find new equilibrium levels.
How Gaps Form
Gaps most commonly appear after weekends: Friday’s closing price for a currency pair, stock, or cryptocurrency may differ sharply from Monday’s opening price. Visually, this looks like a “break” in the price line. The reason is that while exchanges pause operations over the weekend, interbank markets, banks, and financial institutions continue functioning—and demand for currency persists.
Moreover, major economic summits, political speeches, policy announcements, natural disasters, or geopolitical events often occur over weekends. Traders anticipate these developments and place pending buy or sell orders in advance—causing markets to open Monday with sharp price jumps in currencies and other assets. This is called a gap.
Gaps can also form during active trading sessions—not just after weekends—especially following high-impact news releases such as employment data (NFP), GDP, inflation reports, or central bank interest rate decisions.
In various technical analysis schools, there’s a widely held view that markets tend to “fill the gap” over time—that is, return to the closing price of the prior (“pre-gap”) period.
Types of Gaps
Although gaps are relatively rare on Forex—occurring roughly 2–4 times per year per major currency pair—they vary significantly in meaning and implications. The type determines how you should trade them. Here are the main types:
- Common gap: Occurs during sideways price action, usually triggered by short-term, non-market-moving events. It doesn’t signal trend reversal or acceleration and typically closes quickly.
- Breakaway gap: Appears after prolonged consolidation, often when price triggers clustered pending orders at key support/resistance levels. Signals the start of a new trend—ideal for entering positions in the breakout direction.
- Breakout gap: Similar to the breakaway gap, but the breached level loses its significance as future support or resistance—even if the trend doesn’t continue.
- Runaway (continuation) gap: Occurs mid-trend, confirming momentum. Bulls or bears reinforce their positions after positive/negative news—extending the existing move.
- Exhaustion gap: Forms near the end of a strong trend, often after a major news release. Signals diminishing momentum—traders take profits, causing a final surge before reversal.
- Unfilled gap: A problematic gap that fails to close within a reasonable timeframe. Considered “unfilled” if price does not return to the pre-gap close within 15 full trading candles.
Using Gaps in Trading
A gap is more than just a consequence of strong price movement—it often acts as a confirmation signal for that movement. For example, if Monday opens significantly lower than Friday’s close, it suggests bearish momentum may persist. As shown below, the downward price movement continued after the gap.
The opposite occurs when Monday opens well above Friday’s close—the upward gap signals strong bullish momentum. As illustrated below, an existing uptrend accelerated after the gap, pushing price to new highs.
On liquid markets, gaps are frequently filled via pullbacks—meaning price eventually returns to the pre-gap closing level. Only after filling does the prevailing trend often resume. However, this isn’t guaranteed: sometimes the gap fills only after a large directional move.
Dividend Gap in the Stock Market
On the first trading day after the ex-dividend date, stock prices typically drop sharply—often by approximately the amount of the declared dividend. This creates a visible price break on the chart known as the dividend gap.
The cause is straightforward: registered shareholders are locked in for dividend eligibility, while short-term traders sell shares they no longer need post-ex-date.
If market conditions are favorable, this gap usually closes within days—a simple, reliable setup. It forms the basis of effective dividend-based trading strategies.
Trading Strategy: “Fill the Gap”
The “Fill the Gap” strategy exploits one of the most persistent phenomena in Forex trading—the weekly gap between Friday’s closing price and Monday’s opening price. This gap arises because the interbank FX market remains active over weekends and reopens Monday at the price offering the highest liquidity.
The “Fill the Gap” strategy assumes that gaps reflect short-term speculation and excessive volatility—so entering a position counter to the gap direction carries a high probability of profit within several days.
This is a systematic, rule-based approach—clear enough for beginners. Notably, Stop Loss is not recommended, as the full weekly move must be captured. However, this introduces logistical constraints: positions must be opened at the start of the week and closed precisely before the weekly session ends.
Rules of the “Fill the Gap” Strategy
- Select a volatile currency pair. GBP/JPY is recommended—it delivered the strongest backtest results. Other JPY pairs (e.g., EUR/JPY, USD/JPY) are also suitable. The strategy can be applied simultaneously across all major pairs.
- At the start of each new week, check for a gap. It must be at least 5 times larger than the pair’s average spread. Smaller breaks are not valid signals.
- If Monday opens below Friday’s close, the gap is negative—open a long position.
- If Monday opens above Friday’s close, the gap is positive—open a short position.
- Do not set Stop Loss or Take Profit (see rationale above).
- Close the position just before the weekly session ends (e.g., 5 minutes before Friday’s close).
Example of the “Fill the Gap” Strategy in Action
The chart shows 7 weeks of GBP/JPY trading—all featuring gaps. Six out of seven generated profitable signals; only the last produced a small loss. During the test period, GBP/JPY’s average spread was 3 pips, and every gap exceeded 15 pips—well above the minimum threshold. Total profit: 1,612 pips over 7 weeks.
Key Takeaways
Based on the characteristics discussed above, here’s a practical tip: place pending Limit or Stop orders at the pre-gap closing level. For example, after an upward gap, place a Buy Limit order at the prior period’s close—as illustrated in the examples above.
FAQ
What causes a gap in forex trading?
Gaps arise mainly from weekend market closures combined with ongoing interbank activity, news events, or central bank announcements—causing Monday’s open to differ sharply from Friday’s close.
Do all gaps get filled?
No—while many gaps fill within days or weeks due to mean-reversion behavior, exhaustion or runaway gaps may remain unfilled for extended periods, especially in strong trends.
Is the ‘Fill the Gap’ strategy profitable?
Backtests (e.g., GBP/JPY over 7 weeks) show high win rates and solid returns—but success depends on volatility, spread, and strict adherence to entry/exit rules without stop-loss.
