Have you ever heard the term “London Gap” before? If you’re a seasoned trader, chances are high that you’re familiar with this phrase.
However, if you’re new to the trading world, this term might be entirely new to you. In this article, we’ll explore what a London Gap is and how it can be used to your advantage.
What Is a London Gap?
A gap is formed when there is a difference between the closing price of an asset on one day and the opening price on the following day. A gap can occur due to various reasons such as news events, economic data releases, or even simply due to changes in market sentiment.
A London Gap specifically refers to a gap that appears on the charts of financial instruments when the London trading session begins. This session starts at 8:00 AM GMT and lasts until 4:00 PM GMT. During this time period, significant trading activity takes place in the London markets, which can lead to gaps in prices of financial instruments.
Why Do London Gaps Occur?
London Gaps generally occur due to news events or economic data releases that take place outside of market hours. These events can cause traders to adjust their positions accordingly when trading resumes in the London session. For example, if there is positive news for a particular company after market hours, traders may buy its shares when the market opens again in London resulting in an upward gap.
How Can You Use a London Gap?
London Gaps can provide valuable information for traders as they signal potential changes in market sentiment towards an asset. If an asset opens with a gap up or down on high volume, it indicates that there was significant activity during market hours or news release. This could imply that investors are bullish or bearish on that particular asset’s prospects and may continue pushing prices higher or lower throughout the day.
Traders can use London Gaps to their advantage by monitoring the opening price of an asset and placing trades accordingly. For example, if a stock opens with a gap up, traders may consider buying it as there is an expectation of continued bullishness in the market. Conversely, if a stock opens with a gap down, traders may consider shorting it as there is an expectation of continued bearishness in the market.
Conclusion
London Gaps are an essential concept to understand for any trader who wants to succeed in the financial markets. By keeping an eye on these gaps and using them to inform your trading decisions, you can gain valuable insights into market sentiment and potentially make profitable trades.
Remember that like any trading strategy or tool, London Gaps come with their own risks and rewards. It’s essential to do your due diligence and conduct thorough research before making any investment decisions.
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