Gaps and spikes are one bar patterns. Other important one bar chart patterns are one bar reversal, inside day and outside day.
Gaps and spikes
Gaps don’t occur in the 24/7 currency markets. Or do they? That depends on how we define a gap.
And what is a gap? Technically is a hole in the price action due to a price change that happened between the previous close and the next open.
In order to make it extensive for its use in the currency markets lets define gap as a price shock. A very large bar or a spike such as one that is caused by a news event.
The left side on Fig 1 shows a gap on a daily chart of a stock. On the right side, it shows the same gap on a weekly chart as an elongated candle. It would be an elongated candle on its daily chart, too if we draw its open near the previous close.
The trader’s sentiment
The important factor is the traders’ sentiment about the price shock, not the way we see it on a chart.
Using our brand new definition, a gap in the currency markets is a spike, a very large candle, produced by a news event that might have been a hole if the market had been closed during that event.
The Pullback
This pattern is the product of a very large volatility jump, and It’s usually a local top or bottom. Thus, it is usually followed by a pullback, sometimes very large, as we see in fig 3.
The majority of spikes show the direction of a future wave. It may be in the same direction as the current wave or opposite to it. In any case, the gap is an indication of trend direction, at least mid-term. Although, the intelligent trader waits for a low-risk entry on a breakout or breakdown of the pullback segment following the gap or spike.
Unexperienced traders must avoid trading high volatility events such as these. Money is made with method and discipline, not by greedy entries.
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