The foreign exchange rate has the potential to uncover important details regarding certain currencies that a trader may want to trade. Thus, all best Forex trader keep track of the exchange rate shifts, as it plays a crucial role in deciding their exit and entry points as they trade cryptocurrency.
These price/exchange rate shifts are referred to as market gaps and slippage. When a forex trader is cognizant of market gaps, making significant profits is possible by predicting the likely short-term price direction. These market gaps cause slippage and the trader must know how this could have an impact on their trade.
Slippage indicates a difference between the actual and the expected price of a currency and is a risky phenomenon that takes place in a volatile market. Executing orders at the expected price becomes unlikely, and risks can be cut down by executing trades at the next best price, or by using a stop limit to the order at a certain price.
What is slippage?
Slippage is an indicator of the price difference between the expected rate of a trade and the rate of execution. It can take place any time but is most likely when there is higher volatility and when market orders are used. It may even occur when a large order needs to be executed but the trade volume at the chosen price in insufficient to maintain the current bid/ask spread.
How does slippage work?
After an order is executed, it is sold or purchased at the best price the exchange can offer. It may either bring better results, less promising results, or results that come close to the execution price. The difference between the ultimate execution price and the expected execution price is called positive slippage, negative slippage, or no slippage, respectively.
- Positive Slippage: A positive slippage happens at a point when the bid price rises in short trade and the ask price falls in long trade. Thus, there is less of a gap between the price the buyer is ready to pay and more than the price the seller is ready to accept.
- Negative Slippage: A negative slippage happens when the ask price picks up in the long trade and bid price falls in the short trade. It implies a wider gap between the price the seller would accept and the price the buyer wants to shell out.
- No slippage: The term itself explains that no slippage is when there is no difference between the expected price and the present price of the currency.
Slippages happen when there is a delay between the trade’s order and the trade’s completion as the market prices change quickly.
Significance of slippage
After completion the order is sold further or acquired at the exchange’s best price. The outcome could be better, not very promising, or close to the planned execution costs. Positive slippage, negative slippage, or no slippage marks the difference between the final execution price and the anticipated execution price. When market prices keep moving fast, slippages can happen because there is a delay between the trade’s order and the trade’s execution.
What is a market gap in Forex trading?
Gaps are typically huge price breaks that are also referred to as a difference in the closing price of a currency and the opening price of the currency the following day. This involves no trade-in between and the opening price is also lowered. These gaps are depicted as intervals between the price movements that happen by either upwards or downwards movement in the Forex market. They largely take place over the weekend as the Forex market is open 24/7, five days a week, and is closed during the weekends. Such gaps can happen due to a lot of other reasons, such as a major news announcement, a powerful financial breakthrough, or a crisis situation in the global economy.
Significance of market gaps
Gaps help you feel the pulse of the market. When widened, the gap shows that no trader is willing to sell at that particular gap level. In the forex market, this implies that the demand for the currency is exceeding the supply. When the gaps are narrow, we can conclude that no trader is willing to buy at that particular gap.
Gaps should be used as indicators by traders that tell them when to stay out of the market. It is wise to cancel a deal when there is a gap before it goes live to avoid price breaks.
Types of Market Gaps
Here are the five types of gaps in forex trading:
1. Breakaway Gaps
Breakaway gaps are indicators of decisive movement of prices that come out of a certain range or a chart pattern. Such gaps are associated with heavy volumes and are very likely to breakaway. They are largely caused by international news events or revenue announcements that may directly affect the market sentiment.
2. Common Gaps
Common gaps are also referred to as “trading gaps” or “area gaps.” Such gaps are a result of the impact of normal market forces and can take place frequently. They are represented on the price chart with the help of a non-linear jump pattern. Contrary to breakaway gaps, no major news events or revenue announcements result in common gaps cfd.
3. Runaway Gaps
Once a trend starts and sticks around for a while, traders tend to become aware of it. Positive news would attract more traders to the market which could cause a runaway gap or a gap in the middle of a current trend. From this, you can infer that the trend is strong and is gaining momentum.
4. Exhaustion Gaps
Exhaustion gaps could take place at the end of a particular trend and usually follow a major price increase. When you gold trade volumes during exhaustion gaps, it could either be way too high or low than the last runaway gap.
5. Island Reversal Gap
The Island Reversal includes a pattern where the gap is initially in the direction of the trend and, then the price moves sideways and results in a gap in another direction. The price does not go back to the point where the sideways period took place. This results in an island-like shape on the chart.