When traders refer to a "gap" they mean that the height of consecutive bars on a chart is not level. Level bars indicate a price overlap. If the first bar's low is above the second bar's high, then the second currency price gaps lower. If the first bar's high is lower than the second bar's low, then the second currency price gaps higher.
The three reasons for gaps:
1. The asset is illiquid – Sometimes a currency may not trade at all for a period of time.
2. A news event causes prices to move sharply in one direction or the other- Gaps caused by news events can be important because they result from an attitude change in the market’s participants. Sometimes prices do eventually move back into their former trading range because the news had only a temporary effect.
3. A long period of time passes between trades – The importance of these types of gaps depends on the size of the gap, the volume that has moved and whether or not the market continues in the same direction as the gap for most of the trading day.
"Common gaps" occur frequently. Gaps caused by a long period of trading inactivity or gaps that occur in the middle of trading ranges are considered common. Gaps don’t usually add much information unless there is a sudden speeding up or reversal in a trend along with an increase in volume. Without these conditions, a gap within a trading range will not be very significant.
A "measuring gap" occurs in the middle of an important movement within a trend. It is called a measuring gap because the anticipated price movement from the highest price on the day before the gap occurred is supposed to be about equal to the part of the trend that occurred before the gap.
Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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