Let’s talk about gaps, baby.

The way the indices gap versus forex, 25 hrs markets are two different things.

The large players figured out a long time ago that they could move the market the best if they had a branch operating in Asia to guarantee their overnight gains for the US Cash trading session. The gaps occur over there often, on multiple days per week.

Forex follows a continuous Futures contract, on occasion, it can gap intraday around major news when all liquidity gets withdrawn for the market temporarily and the broker applies a 20x multiplier on the spread at the same time. These gaps can be a 10+ pips displacement, otherwise, the real gaps only happen from Friday night close to Sunday night open.

The market makers get a dose of orders and either hedge at the open (rare, like a gamma-squeeze is in Forex) or dump some of their holdings by giving fills that cause an initial push in the vacuum.

The first thing to say is that most Forex gaps would be trimming some imbalance, thus the move would occur in the direction of the Hourly 240 SMA. This re-balancing move secures some extra liquidity making the move last longer after the small recess.

Here are 2 examples of that:

Notice that at the close the market is decidedly outside 2 std deviations from the 240 SMA. Also notice that these last 2 gaps not just got closed, but made a marginal higher high (4 to 11 pips) before a dip a little lower and then a continuation move up.

The next example is a gap away from the 240 SMA:

So far every gap filled almost immediately.

The last example is a gap away – this is a rare event when the move is first riding the 2 std band and not pulling away from it by the close (accelerating). This gap took 3 days to fill.

These gaps can be 20-30 pips wide (and some of it is merely the spread).

As a rule of thumb, if the finish was within the bands, the market would gap away, inside the bands the market would gap towards the closer band.

This is a useful piece of information on making hedging decisions into the weekend.

The last thing to talk about is that a 140+ pips wide gap is not likely to close fully.

The 200-pip gap below only closed back 93. This is a weekly chart. Not sure what happened between the 16th and the 18th of May, 2017 but it had to be a serious central bank invention.

Friday’s close was outside the 2sd band, so it should be gapping down.