As many of you are aware and saw, the markets opened up in a big gap after the weekend. Basically it means that the markets opened at a different price than the market closure price on Friday. I would like to take the opportunity to explain briefly what causes those gaps and what are the risks involved.
So why do market gaps occur?
The markets work in a bid and ask system- meaning in order for the price to change someone has to offer a price to sell (BID) and on the other hand someone has to agree to buy (ASK), after both sides agree the transaction is made and the price is updated to the transaction price. So after a big break like the weekend the next best offer can be far off the closing price.
When can we expect to have big gaps?
When we have events that affect the market – financial, political, announcements, natural disaster and more.
How can you predict market gaps?
You cannot always predict, some events are planned ahead (elections for example) so we can try and predict that there is going to be a market swing during the weekend. Sometimes we have things occurring which are out of our control.
What does this mean for my Stop Loss, Take Profits and Orders?
As we are working with the markets, we cannot offer prices that simply do not exist, as no bank (or any liquidity provider) will give us a price that does not exist we cannot provide it as well. Please be aware this is not an eToro limitation, this is how the markets work (true also for the stocks markets, or any other market).
Does this happen only during the weekend?
No. You can have gaps during any trading day, when you have events that move the markets. Weekend gaps are more noticeable, as they are usually bigger gaps as there is no liquidity during the weekend.
Will I always lose from this?
Not always, as your SL might get “skipped” this can also happen to your TP and profit more than you have set yourself.
Here is an example of the $USJPY chart from the past weekend:
As you can see the $USDJPY closing price was 95.2 and the markets opened at 94.2 which is around 100 pips difference. This is not a usual move in a weekend, but we have already seen moves like this. For example in December last year during the Japanese elections, we saw similar moves. And this weekend we saw big moves correlated to the $USD- you can see also gaps in the $EURUSD, $GOLD and others.
So please be aware of big events, you cannot always foresee big moves, but you can protect yourself, by reducing your leverage, and having enough to survive a big market move. The lower the leverage you use, the lower the chance you will lose more than you have initially invested.
If you have any questions feel free to ask on my OpenBook wall: @adamSeToro