Market gaps are an intriguing phenomenon that often catch
the attention of traders in CFD trading. A gap occurs when the price of
an asset moves sharply, creating a “void” on the price chart between the
previous close and the next opening price. These gaps can be a goldmine for
traders who know how to interpret and exploit them effectively. By understanding
the different types of gaps and their causes, traders can position themselves
to capitalize on these sudden price movements.
What Are Gaps in CFD Markets?
A gap happens when an asset’s price opens significantly
higher or lower than its previous closing price, skipping over intermediate
price levels. These gaps often appear during periods of high volatility or in
response to major news or economic events. In the CFD market, gaps are
particularly noticeable because trading hours often coincide with the
underlying asset’s market schedule, leaving room for price adjustments during
market closures.
Types of Gaps and What They Mean
1. Breakaway Gaps
Breakaway gaps occur at the beginning of a new trend, often signaling the start
of a significant price move. These gaps are typically accompanied by high
trading volume and occur when the market reacts strongly to news or a breakout
from a consolidation pattern.
2. Runaway Gaps
Also known as continuation gaps, these occur during a strong trend and signify
that the market is picking up momentum. Traders can use runaway gaps as
confirmation of a trend’s strength, providing an opportunity to enter positions
aligned with the prevailing market direction.
3. Exhaustion Gaps
Exhaustion gaps appear toward the end of a trend, often signaling a reversal or
a loss of momentum. They are typically accompanied by lower trading volume and
can indicate that the market is overextended.
4. Common Gaps
Common gaps occur within a trading range and usually lack significant news or
momentum behind them. These gaps are less predictable and often fill quickly,
meaning the price retraces to cover the gap soon after it appears.
How Gaps Affect CFD Trading
In CFD trading,
gaps create both opportunities and risks. For traders, the sudden price
movements associated with gaps can lead to quick profits if the gap direction
aligns with their position. However, gaps can also expose traders to higher
risk, as prices may move unpredictably or fail to behave as expected.
Example of Gap Trading
Imagine a stock CFD closes at $100 on Friday, but unexpected
positive earnings news causes it to open at $110 on Monday. This creates a
breakaway gap. Traders who anticipated the news could capitalize on the upward
momentum by entering a long position. Conversely, if the price is expected to
retrace, a short position targeting the gap fill could also be profitable.
Gaps in CFD markets offer exciting opportunities for traders
who understand how to interpret and exploit them. By identifying the type of
gap, using technical analysis for confirmation, and employing effective risk
management, traders can turn gaps into a valuable part of their trading
strategy.
However, success with gap trading requires discipline,
preparation, and a clear understanding of the risks involved. With the right
approach, gaps can become more than just anomalies on a chart—they can be a
gateway to profitable trades in the fast-paced world of CFD trading.
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