Written by Dean Kleb
A gap in the foreign exchange market simply means a break between 2 currency pair prices where no trading takes place. Since the forex market is a 24 hour market and extremely liquid, these gaps are rarely seen.
Forex Market Gap Example
Remember that Sunday morning when news reports emerged that Saddam Hussein has been captured? The currency markets were closed for the weekend but set to open on Sunday evening “ET”. On that occasion the EUR/USD currency pair opened that evening with a 130-pip down gap.
The illustration below is meant as a visual reminder that no matter what the market or the level of market understanding, although few and far between, there are pockets of extraordinary volatility where traders get off sides.
That, combined with a market shock, can lead to short term periods of scarcity of liquidity and a sharp price movement that is outside what normal statistical modeling can predict.
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