When you say “gap” in the course….as in the market gapping….that, I presume to mean a sharp volatile move…but not an actual weekend gap move from Friday’s close to Sunday’s opening, correct?
My Response: (revised and updated for website)
Volatility moves are where there is a sharp price movement. These can come in the forms such as ODVE, MDMM, GM, or intraday volatility moves. There are “clean” and “messy” volatility moves. The clean ones are where the easy money is located. The messy ones are where the difficult money is located.
Volatility movements can be both liquid and illiquid. For example, there can be a stop cascade that forms a large part of the intraday movement. That can be an illiquid movement as the price may not have traded at every pip during the volatility move. (Although if you are trading small sizes of a few mil or less, then it may be perfectly liquid for you, but not for the big hedge funds). Other volatility moves can be liquid where the market trades at every, or almost every pip/tick point with decent/good liquidity. If you see a gradual 150 pip ODVE happen over the course of the day, that that is a volatility move, but there was liquidity available at every pip/tick point.
Gaps are a type of volatility movement. Gaps are sharp price movements (volatility) to be sure! However, the difference is that during a gap, the market does not trade at certain price points.
1. Lets say a stock closes at $100, and stays there in after hours trading. If overnight, some bad news happens, and the stock opens at $80, then that is a $20 gap. It is both a gap and volatility move. It is a volatility move, because that was ODVE to the bearish side. It is a gap because the price did not trade in between $100 and $80.
2. Let say the GBP/USD is trading at 1.5500. A piece of news comes out that causes a 100 pip bearish FM spike. Just because you see a 100 pip spike down, doesn’t mean that every pip in between was traded. The market could have gaped certain price points in between. Therefore, certain FM spikes can be considered gaps. But because forex is a 24 hour market, 5 days a week, it doesn’t show up as a gap since there are transactions occurring every minute or few minutes (even if small size).
3. Another example is when the SNB did the 1.20 EUR/CHF floor. The market gaped higher. If I remember correctly, EUR/CHF was spiking higher 50-100 pips every minute to the bullish side until it hit 1.2150 or something. The market didn’t trade at every pip in between.
4. Gaps do not happen too often in forex since it is a 24 hour market. However, there are weekend gaps in forex that still do occur. The 1985 Plaza Accord trade started off as a weekend gap. The USD/JPY gapped lower a few hundred pips and started dropping from there.
There is nothing wrong with gaps… so long as they are in your favor! If you get the news/sentiment/fundamental/macro correct, then they will typically be in your favor. If you get the news/sentiment/fundamental/macro wrong, then the gaps are going to go against you.
For example, when PTJ was short S&P futures the Friday before Black Monday 1987, he didn’t have anything to worry about… so long as the news/sentiment/fundamental/macro was on his side. It was on his side and when the market opened on Monday, it gaped lower and crashed later that day. He was short so he didn’t have to worry that prices gaped. The only relevant question was when to cover his short. There would of of been plenty of panicked longs screaming to get out and willing to sell to PTJ covering his short position, so long as he timed it right.
Same thing with being long bonds in 1987: