Simple Explanation: What Is a GAP in Trading?

Gaps are areas where the price of an asset moves sharply up or down due to insufficient demand for existing supply and vice versa. As a result, the opening price is significantly lower or higher than the previous day's closing price. Thus, a gap can be seen on the candlestick chart between the close of one candle and the open of the next candle.

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Types of GAPs:

1. Common Gaps: As the name suggests, these gaps occur frequently and are filled quickly.
2. Breakaway gap: Breakaway gaps occur in support and resistance areas or when the price breaks a price pattern.
3. Runaway gap: usually appears after a breakaway gap and shows a continuation of the trend.
4. Exhaustion gap: This type of gap is marked by a smaller gap in the price after a rapid increase in the price of an asset over several weeks. This gap shows or signals the end of an uptrend.

In the traditional financial market, these types of Gaps are well known by traders. Conversely, for cryptocurrency traders, given that trading platforms operate 24/7, this type of trading became useful at the end of 2017 when the world's largest derivatives exchange, the Chicago Mercantile Exchange (CME), started offering futures contracts on BTC.

In its simplest form, Bitcoin futures are derivatives that allow investors to determine the future price at which an asset will trade. For example, an investor may choose to enter into a contract to buy Bitcoin at the price of $25,000 by the end of the month, even though the current price of Bitcoin is $30,000. The buyer pays a fee to open this contract and reserves the right to purchase or not Bitcoin if it reaches $25,000 by the date stated in the contract. If the price of Bitcoin does not reach the amount set in the contract, the buyer only loses the fee for concluding the contract. CME futures contracts usually expire on the last Friday of each month.

Bitcoin futures contracts are ideal for investors who want to take advantage of Bitcoin price fluctuations without owning Bitcoin.

CME GAP Explained

The GAP is the difference between the trading price of a CME Bitcoin futures contract when the market closes on Friday and opens on Sunday. The gap occurs because there are no trades between Friday's close and Sunday's open. The difference may also occur during public holidays, when CME is closed.

The last trade of the week on the CME futures market takes place on Friday at 17:45 Eastern European Time (EST) (or 22:45 London time). The weekend is a perfect example where we can see the Gap. The price of Bitcoin at the close of CME on Friday may be higher or lower than the spot price of Bitcoin on open exchanges such as Coinbase, Binance or Uniswap. The CME's trading schedule resumes at 18:00 EST (23:00 London) on Sunday. If the Bitcoin price on exchanges is higher than the previous Friday's CME closing price, the Bitcoin price usually falls within the first 24 hours to align with the CME price. If the price is lower than the previous Friday's CME close, then Bitcoin price is expected to rise.

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It is important to know that the Gap does not have to be completely filled although, historically speaking the percentage of closed CME Gaps is 60-80%. There are 2020 and early 2021 CME Gaps in the $8,000-$24,000 range that are not known to close or not.

Without investing directly in CME futures contracts, there are ways to trade CME gap or expiration contracts in the correct market conditions. The first two are directly related to the asset. The last two have increased complexity, but are extensions of using the same market insights.

Four Ways to Trade CME GAP

The first of them includes the direct purchase of the asset. This would mean purchasing the asset at a lower dollar price and selling the quantity after the price rises.

The second way is to try to multiply the asset, a method that involves taking the position before the price drops. Holding the underlying asset, the trader sells a quantity of Bitcoin at a higher price and waits for the CME drop to occur. Then the investor buys back with the amount of money he sold the original position for and walks away with more Bitcoins than he previously had. In the worst case: the investor has to buy back the investment with less Bitcoin than he previously had if the price moves in the opposite direction of his choice.

Third, a trader can use different exchange platforms to trade using leverage or margin trading. For long positions, the trader puts up collateral to borrow money used to purchase a larger position in Bitcoin at the current price, which they will then sell for a profit if the price rises. If the price falls, they can be liquidated (left with a zero balance in their position) of their collateral.

Fourth, using the exchange platform for margin trading, but this time to sell short. This involves borrowing Bitcoins at the current price, selling them, and returning the borrowed Bitcoin later in the hope that the price will drop.

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