This is simply a blank space that appears between two candles on the chart. It represents a sudden price change during periods where no apparent trading takes place. Normally, this occurs between one day’s close and the other day’s open. However, it can also occur during the day. For example, after a significant news release where prices suddenly change.
There are two types of gaps. The up gap develops when the low price at the close of the session is higher than high price of the previous session. The down gap on the other hand develops when the high price at the close of the session is lower than the low price of the previous session.
Once a gap develops, the space created forms a support/resistance range. In the example above, a down gap is created. You should expect that once the price rises and enters this range, it will start falling again.
Most IQ option traders refer to this support/resistance range as a gap test. This means that at a later time, this gap eventually gets filled where prices fluctuate up and down within this range.
In the example above, you’ll notice that a gap develops along the uptrend. This type of gap is a runaway gap. These are created due to increased interest in the underlying asset.
For example, bulls might have thought that the trend is exhausted. However, price retracement doesn’t happen. This results in the buyers suddenly jumping into the market resulting in a sudden price spike.
This gap can also be the result of a significant news release which results in a sudden change in prices.
The good thing about runaway gaps is that the develop along the trend. Once you see this type of gap, your trade position should be along the direction of the trend.
Gaps are quite rare. But when they occur, they offer excellent short term trading opportunities. Now that you know how to trade gaps, try them out on your IQ Option demo account today. Share your results in the comments section below.