Gapping describes when the price action of a security jumps to a new price not directly adjacent to the previous price, creating a gap between ticks on a price chart. Gapping can occur during a trading day, often when there is low liquidity and the asset price is heavily affected by a lower level of trading.
More commonly, gapping occurs when a financial security opens above or below the previous day’s market close. This gap is caused by the trading that has occurred outside normal hours which isn’t represented on the price chart.
Gapping can be partial or full:
- Partial gapping occurs when opening prices are lower or higher than the previous day’s close but inside the last day’s price range.
- Full gapping occurs when the open is outside of the previous day’s range.
How to reduce the risk of gapping in trading
Gapping is more common in stock markets than in forex markets because FX is open 24 hours per day.
You can reduce the risk of gapping by not trading or holding positions overnight or before important news announcements that could impact the asset’s price.
If you still want to trade during times when gapping is most likely to occur, you can reduce your position size during these periods or use stop losses and hedging to guard against the price gapping against you.