Forex Supply and Demand: Novice Gap vs. Pro Gap - ForeXposed

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Thursday, February 23, 2017

Forex Supply and Demand: Novice Gap vs. Pro Gap

We often see a gap happens in the market. There is little difference between spot (forex) market and other markets such as equity (stock). The characteristic of the equity market is centralized and have specific operations hours, the gap often comes every day on the opening bell. While the forex market operational is 24 hours. Normally, the gap occurs at the beginning of the week or at the beginning of the first week of the month/year.

Forex Supply and Demand: Novice Gap

On the uptrend, the so-called novice gap is gap up or a spike on the prices, which the opening price spike above the previous high candle/bar. This gap occurred after strong rally takes place.

The cause is 'buy action' by beginners, where the professionals, on the contrary, stay away from making ‘entry’ after the prices rose with strong moves. And the possibility they will buying after a gap up is small.

The main cause why the beginners do ‘buy action’ is triggered by fundamental news which is perceived good news for specific instruments. The Supply and Demand Law will make the forex beginners almost always in the losing position if they continually do this sort of thing.

The Typical of novice gap up is happen around the supply area (resistance), which indicating the end of the rally or the uptrend o the observed time frame. Gap up like this often triggering the start of a downtrend.

Consider the following illustration image:
Forex Supply and Demand: Novice Gap vs. Pro Gap

This is also happening on the downtrend. If you see a gap down, you should be alert, because this gap usually triggered by beginner selling action after the prices are declined (downtrend). Gap down that take place in the demand area (support) almost always indicates the beginning of an uptrend. If the gap up is in the supply area, the pro gets a chance to distribute short positions, while the gap down is at the demand area, the professional operators will begin to accumulate a long position.

Let us look at the case of AUD/USD (AU), where the gap can illustrate a novice gap type at the beginning of this year:
Forex Supply and Demand: Novice Gap vs. Pro Gap

AU spike at the opening of the market (magenta circle 2), and gap up is happening at the peak of supply area (resistance). Also note, how the price moves around until a few days later in this area. This is the consolidation, and the opportunity for professional operators to perform a distribution (short position). Don't be thinking that after the price touched the resistance, then he must come down. Not so easy, especially if we look at the big frame. The orders by institutions in large numbers are not as easy as it to be executed.

The operator must perform the maneuver for all orders that are owned in a particular area/level can be executed. This may take several days, even several weeks. But in the end, after the distribution process takes a place, the price balance will be shifted and begin the process of the downtrend.

How far the downtrend will happen, everything still refers to how big the imbalances happen. Although for the benefit of trading, we can predict the downtrend will last until the next demand area.

Forex Supply and Demand: Professional Gap

Not like the gap that happen because ‘buy/sell’ action of beginners, the professionals doing the opposite. In the uptrend, especially when prices are at a supply area (resistance), the pro will perform the selling action on a huge quantity, causing a gap down at the opening.

This is done to make other market participants do not have the opportunity to take a favorable position, at once triggering buyers stop loss that typically is beginners. Again, we use AU chart and observe the magenta circle area (1).

Here's a sample of pro gap:
Forex Supply and Demand: Novice Gap vs. Pro Gap

This process can also happen when a downtrend where the prices are in a demand area, then gap up on the opening week.

Conclusion:


  1. Do not rush to do open ‘Buy’ when gap up was in the supply area.

  1. Do not rush to do open ‘Sell’ when gap down was in the demand area.

  1. Analyze the supply and demand area to prepare ‘Buy’ action when the gap up comes from the demand area.

  1. Analyze the supply and demand area to prepare the 'Sell' action when the gap down comes from the supply area.