A gap, or “price break,” is a term often used in traditional stock and forex trading, as well as crypto trading. A gap occurs when the price of an asset suddenly moves a significant number of points up or down without any trades in between. Gaps are visible on charts as empty spaces between candlesticks. In the 24/7 crypto market, gaps are less common than in stock markets, but they can still occur, especially in futures markets and when moving between different exchanges.
What is a gap and why does it occur?
#A gap occurs when a market opens at a price significantly different from the previous closing price, and no trades are made between those levels. Gaps are more common in stock markets, where there are breaks in trading, especially after weekends or important news. In cryptocurrencies, which trade around the clock, gaps are most often associated with sudden changes in supply and demand or with strong market news, such as exchange hacks or sudden regulatory announcements.
Types of gaps
Gaps can be divided into several main types depending on their origin and significance for the market:
Common Gaps: These occur during quiet periods and are usually quickly filled by the market, meaning that the price returns to the level from which the gap occurred.
Breakaway Gaps: These form when the price of an asset breaks out of a narrow consolidation range. Such a gap can signal the beginning of a new trend, as the price begins to move in the direction of the breakout.
Continuation Gaps: These gaps occur in the middle of a trend, confirming its strength. Continuation gaps signal that the current trend is strong enough and buyers or sellers are willing to push the price further.
Exhaustion Gaps: These gaps appear at the top or end of a trend and may indicate exhaustion. These gaps are usually followed by a trend reversal or correction.
Cryptocurrency Market Gap
Gaps are less common in crypto trading than in stocks due to 24-hour trading. However, gaps do occur, for example, in futures markets. One well-known example is the CME (Chicago Mercantile Exchange), which trades Bitcoin futures and operates on a schedule. If there are significant changes on weekends or at night, this can cause a gap at the opening of trading on the CME.
How to use gaps in crypto trading?
Gaps can be a valuable indicator for analyzing market behavior, but require caution and understanding of their nature.
Trading to close a gap: There is a rule in trading that the market often wants to close a gap - to return to the price at which it occurred. This is especially true for regular gaps. For example, if the price of an asset closed at $20,000 on the CME on Friday but opened at $19,500 on Monday, traders can expect the price to return to the $20,000 level.
Using Gaps as Support or Resistance: Gaps can serve as temporary support and resistance levels. For example, a breakout gap can mark a new resistance area where price may encounter difficulties.
Signs of Trend Exhaustion: If an exhaustion gap is observed, it may be a signal to exit the position, especially if it forms after a significant price move. Such a gap shows that interest in continuing the trend is fading, and the price may start to move in the opposite direction.
Examples of gaps in the crypto market
CME Bitcoin Futures: Gaps in CME Bitcoin futures are notorious in the crypto community as they sometimes foreshadow short- or medium-term price moves. In 2020, when Bitcoin was trading around $10,000, CME showed a significant gap, which led to increased attention from traders. The gap closed within a few weeks, and the price touched the opening level again.
Binance Coin (BNB) Gap: In 2021, following the launch of Binance Smart Chain and the surge in interest in DeFi, BNB also experienced price gaps. These gaps were an indicator of strong investor interest and sustained demand for the token, especially as the DeFi platform grew.
How do gaps affect market psychology?
Gaps attract traders’ attention because they create a sense of “missed opportunity” or fear. Many traders view gaps as signals to take action, believing that they reflect unexpected strength or weakness in an asset. However, a gap can be a risk as well as an opportunity, especially if it turns out to be false. Therefore, it is important to use additional indicators and not make decisions based on gaps alone.
Analogues of gaps in crypto trading
While traditional gaps are not as common in the crypto market, there are similar phenomena such as:
Pump and Dump: Rapid price increases and decreases can create temporary gaps on charts, especially on low-liquidity tokens.
Sharp Moves on News: Big news announcements, such as a partnership or a hack, can cause a sharp break in price. This is not a classic gap, but its effect on the market is similar: participants suddenly change their behavior, and the price moves rapidly.
Risks associated with gaps
Trading gaps or using them as signals requires caution. Gaps can be caused by short-term fluctuations in interest or even manipulation in low-liquidity markets. Before using a gap-based strategy, it is important to study the gap history for a particular asset and monitor trading volumes to assess the strength of the gap.
