Description

A CME Gap is a term used in trading that refers to the difference between the closing price of one trading day and the opening price of the next trading day. It is also known as an opening price gap.

The CME Gap can occur when a news event or other market-moving event happens overnight or over the weekend that affects the price of a security. This can be a dramatic news event such as a major earnings announcement, a geopolitical event, or a natural disaster. It can also be something less dramatic such as a corporate merger or acquisition.

The size of the gap is determined by the amount of buying or selling pressure that the news event created in the market. If the news was perceived to be positive, then buyers may rush in to purchase the security, creating a gap up (where the opening price is higher than the closing price of the previous day). Conversely, if the news was perceived to be negative, then sellers may rush in to sell the security, creating a gap down (where the opening price is lower than the closing price of the previous day).

The CME Gap is an important concept for traders to understand because it can create opportunities in the market. For instance, if the news event is perceived to be very positive, then traders can buy the security at the open, ride the momentum of the gap, and then sell at a higher price. Similarly, if the news event is perceived to be negative, then traders can short the security at the open, ride the momentum of the gap, and then cover their short at a lower price.

Traders should be aware of the CME Gap when trading, as it can provide significant trading opportunities. However, traders should also be aware of the associated risks. For instance, if the news event is not as positive or negative as initially perceived, then the gap may quickly close, resulting in a loss for the trader. Additionally, gaps can also lead to false breakouts, which can result in traders taking positions on the wrong side of the market.

Therefore, it is important that traders use a combination of technical analysis and fundamental analysis to identify news events and determine whether they are likely to create a CME Gap. Additionally, traders should also be aware of the potential risks associated with trading gaps and be prepared to adjust their strategies accordingly.