forex flutuation

forex flutuation
 Gaps are situation that occur when a financial asset’s opening market price is higher than its closing price from the previous trading day. In a price chart, this will end up showing as an ‘empty’ space from the previous day’s closing price to today’s opening price. The closing price is taken from 4pm (EDT) the previous trading day to the present 9.30am (EDT) opening price. Gaps in prices can be either up or down and they can occur in any financial market. Although, trading after market hours is possible through the Electronic Communication Networks (ECNs) beginning from 8am to 8pm, they are not considered as the ‘typical’ market trading hours. Hence, for our purpose of discussion, post and pre market trading activities do not count as affecting the price gap.
 For example, a financial asset closed at $50 at 4pm (EDT) from the previous day trading. After market hours trading continues and pushes the price up to $52. At 8am the next day, the asset continues to be traded at an opening price off $52.50. Let us say that by 930m (the normal opening time for the market), the price of the asset have dropped down to $50.50. The price difference that is taken as the ‘Gap’ is just 50 cents and all the fluctuations that occurs during the aftermarket hours trading is not taken into account. Even though the asset had been traded and gains or losses have occurred, these occurrences do not affect the ‘gap’ in any way. Gaps in prices occur usually due to a news event. A financial asset can gap down or up when it react to news like earning reports or earning pre-announcements, upgrade or downgrade of its financial rating by an analyst, rumours or comments by key personals.

 Nevertheless, gaps are not isolated to just a single financial asset. It can also occur to a whole class of assets, group of stocks or even the whole market due to news or report about the whole economy being released. Political news or world events can also cause gaps (A good example of a world event which caused a huge gap down was the 9/11 incident in New York). Regardless of the reason, gaps usually occur as a result of an event that happened during the time that the market is closed. Because of the event that resulted when the market was closed, this created a strong buying or selling pressure when the market reopen causing a gap down or gap up situation.
 The reason why ‘gaps’ are important in the analysis of prices is the fact that they are often indication of a major change in momentum for the financial asset. Normally, during a large gap up at the opening of the market, never buy into the market. Conversely, when there is a large gap down at the opening of the market, never sell short at the opening of the market. Staking a market position during a large gap up or down is a risky situation as the gap is usually extended by the market maker as well. One way to deal with price ‘gaps’ is to fade in; in other words, play the market for the prices to come back to its original position. Thus, go short when there is a large gap up and vice versa.