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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Trading Mistakes: what are gaps and why are they important?

IG analyst, Axel Rudolph sits down with IGTV's Angeline Ong to discuss why price gaps don's always get filled, a common trading mistake.

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(Video summary)

The truth about trading gaps

In this video about trading mistakes, senior market analyst Axel Rudolf sits down with IGTV's Angeline Ong to explain the common error of assuming that gaps in trading will always close.

He uses the example of cotton to illustrate this concept. He points out two gaps on the chart, where the first gap was indeed filled, but the second gap remained open. Axel explains that not all gaps get closed, as some indicate an end to a movement rather than a continuation.

Exhaustion gaps, measuring gaps, and breakaway gaps

To better understand these gaps, Axel differentiates between three types: exhaustion gaps, measuring gaps, and breakaway gaps. Exhaustion gaps occur in the middle of a movement and suggest trend exhaustion. On the other hand, breakaway gaps typically happen at the end of a downward trend when the market breaks away into new territories.

Axel cautions traders against assuming that all gaps will eventually close by using the example of an unfilled gap in November 2022 that still remained open in June 2023. This demonstrates the danger in assuming that every gap will be closed.

To successfully trade gaps, traders must first correctly identify the type of gap they are dealing with, whether it is an exhaustion, measuring, or breakaway gap. However, determining the type of gap is not always easy. Axel suggests that if there is a fast upward movement followed by a decrease in volatility, it is likely an exhaustion gap. To confirm the type of gap, traders can rely on other indicators such as oscillators, relative strength index (RSI), stochastic indicators, moving average convergence/divergence (MACD), or wave theory.

Axel concludes by acknowledging that correctly identifying and trading gaps requires practice and experience. Traders must learn to interpret various indicators to make informed decisions. So, if you're new to trading, it's important to gather experience and start learning how to interpret different indicators to trade gaps successfully.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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