Tuesday, January 6, 2009

Note about price gaps

For those people who have already traded other markets, you probably know about price 'gaps'.

'Gaps' occur when prices 'jump' from one price level to another without having taken any incremental steps to get there. For example, you may be trading a share that closes at $10 at the end of today but due to some event that happens overnight; it opens tomorrow at $5 and continues to go downwards for the rest of the day. Gaps bring about another degree of uncertainty that may meddle with a trader's strategy. Probably one of the most worrying aspects of this is when a trader uses stop-losses. In this case, if a trader puts a stop-loss at $7 because he no longer wants to be in a trade if the share price hits $7, his trade will remain open overnight and the trader wakes up tomorrow with a loss bigger than he may have been prepared for. After looking at a couple of forex charts, you will realize that there are little price 'gaps' or none at all, especially on the longer-term charts like the 3-hour, 4-hour or the daily charts.


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