Understanding Liquidity Gaps and Why They Form
Liquidity gaps form when the order book has missing price levels — areas where almost nobody is willing to trade. When price hits these zones, it moves fast because there’s nothing there to slow it down. If you don’t know how these gaps form, you’ll constantly get blindsided by sudden jumps.
What Exactly Is a Liquidity Gap?
A liquidity gap is a section of the price ladder with little to no resting orders. That means:
- No buyers stepping in
- No sellers offering resistance
- Minimal friction when price moves through it
Once market orders hit that area, the price basically “teleports” to the next zone with actual liquidity.
Why Liquidity Gaps Form
1. News Shocks and Fast Repricing
When unexpected news hits, traders yank their orders. The book thins out instantly. Price rips through empty space looking for new value.
2. Overnight Trading Conditions
During low-volume sessions, especially after daily settlement, the book can be extremely thin. This creates built-in gaps that explode once volume returns.
3. Algorithmic Order Pulling
High-frequency algorithms frequently pull liquidity to avoid getting run over. When they disappear, gaps open up instantly.
How Liquidity Gaps Affect Price Movement
| Condition | Result |
|---|---|
| Thin order book | Price accelerates sharply |
| Order pullbacks | Gaps appear mid-move |
| Low volume sessions | Higher probability of gap runs |
Liquidity Gaps vs. Liquidity Pools
Liquidity gaps are the opposite of liquidity pools. Pools attract price. Gaps let price fly. If you haven’t already read it, check: Liquidity Pools Explained.
Why Traders Must Respect These Gaps
Liquidity gaps aren’t random — the order book telegraphs them. When you enter a trade without knowing where gaps sit, you risk getting slipped, trapped, or blown out instantly.
Final Thoughts
Liquidity gaps form because liquidity either gets pulled or never existed in the first place. When price enters a gap, it accelerates violently until it hits real orders again. Learn to spot these voids and you’ll finally understand why markets “jump” instead of moving smoothly.