I’ve been following the price of USD/JPY, I noticed that on the 10th it was bouncing off the 200 day
moving average, and the fundamentals looked good for me to be bullish on the USD/JPY (I’m no expert here)
blogs I have been reading are saying the pair may continue to go up ??
If i look on the daily chart, it looks like the pair is still bullish, or perhaps the uptrend is slowing
however If I switch to the 4 hour, or 1 hour view, There is a big 200-300 pip downward gap and it looks like the pair has just dropped all of a sudden between the candle for friday, and the candle for midnight on Sunday EST.
could someone explain this to me… I’m only a beginner!
Cheers
Gaps are created for a variety of reasons, most likely there was some sort of news released over the weekend that created a buzz. This causes the bid/ask spread to widen to a point that you see a significant gap. There are four different categories of gaps; breakaway, exhaustion, common, and continuation.
Breakaway gaps occur at the end of a price pattern and signal the beginning of a new trend. Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows. Common gaps are those that cannot be placed in a price pattern - they simply represent an area where the price has ‘gapped’. Continuation gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying currency’s future direction.
If the gap has been ‘filled’, that means the price moved back to the original pre-gap level. This is a common occurrence and can happen because of:
Irrational Exuberance: The initial spike may have been overly optimistic or pessimistic, therefore inviting a correction. Technical Resistance: When a price moves up or down sharply, it doesn’t leave behind any support or resistance. Price Pattern: Price patterns are used to classify gaps, and can tell you if a gap will be filled or not. Exhaustion gaps are typically the most likely to be filled because they signal the end of a price trend, while continuation and breakaway gaps are significantly less likely to be filled, since they are used to confirm the direction of the current trend.
When gaps are filled within the same trading day on which they occur, this is referred to as fading. This is what you usually see on a Sunday evening when some sort of ‘exciting’ news has been released over the weekend.
Hope this helps, I’ve done some gap trading and it can be profitable, it just takes some time to get used to as you need to understand where in the trend it is happening and why.
