An old axiom that often proves to be true when trading financial markets is that “Gaps will be filled”. Gaps occur when prices suddenly gyrate to a higher or lower level, without setting any particular levels of support or resistance. Depending on the type of gap, there is a high probability that market prices will return to previous price points, thus “filling the gap”. Bitcoin has been rocketing off the charts of late, forming “gaps galore”, as one trader described it. For traders that follow such things, the “galore” term can also apply to opportunities for gain, if you are familiar with how to play the gaps.
For those unfamiliar with this scenario, here is one trader’s take: “In financial markets, ”filling the gap” is a process in which an asset returns to previous price levels where a void in a chart has formed, due to the price of the asset rapid growing or falling while trading sessions are offline. When trading resumes, the price of the asset is far lower or higher than it was at close, leaving an unfilled gap. Gaps are more often than not found in a speculative asset such as cryptocurrencies. The overly irrational emotions tend to drive prices higher (or lower) and faster than in other markets, creating such gaps.”
There was a brief example of this price action on the Kraken exchange just the other day. A “flash crash” occurred on this U.S. crypto exchange, when the value of Bitcoin versus the Canadian Dollar, a pair with low liquidity that can easily overreact to market events, suddenly plummeted to $100 and change. The previous market price had been over $1,200. For five minutes, there was a rush to buy this crypto pair at apparent bargain prices. A “gap” formed, but after five minutes, the order was filled, and prices returned to normal after a bit of anxiety for this, as well as other, Bitcoin pairs.
No one is exactly sure of the reason for the “Flash Crash” and temporary “gap”, but the general thinking is that some unfortunate soul made a key entry error by misplacing the decimal point in the sell order, possibly a miss-entry of a protective stop-loss order. The lesson here is to be extra careful when entering sell or buy orders, but the example demonstrates how “irrational exuberance” can overtake a market, form a gap, and then refill the gap after the sudden reaction is not taken up by the rest of the market.
Traders are now busily analyzing previous pricing history for Bitcoin during its 2018 fall to ascertain areas where the token reacted wildly, leaving gaps, as old as a year or two in its pricing history. As Bitcoin continues its present rise to its previous all time high, it will be crossing these zones, so to speak, creating a very specialized trading opportunity. We touched on the “irrational exuberance” type of gap, but there are also what are called “continuation” and “exhaustion” gaps, the latter occurring when momentum disappears, typically at the end of a trend. There are various methods that can be employed to benefit when either of these types appear on your screen, as well.
Traders in the futures market on the CBoE have discovered two prominent gap areas – “– one at $6,500 and another between $8,000 and $8,500. These two gaps are the result of powerful upward movements during hours trading was offline at CBOE.” As for the timing of these types of gaps being filled, it can vary from the same trading session to days, weeks, months, and even years, or maybe never. Odds favor a filling, and as we were taught in our early forex tutorials, the only way to win consistently in volatile markets is to find an “edge”, i.e., a situation where the probabilities exceed 60% and where you then develop a disciplined trading strategy to leverage this knowledge.
For the time being, the attention has focused on two gaps that occurred above $10,000. Will Bitcoin return to fill these gaps of old? The odds may favor such a move, but then it is not a sure thing by any means. It is, however, one more reason that supports the current consensus that Bitcoin will eventually establish a new all time high. Time will tell.