Gap is Gap Based Trading Strategy

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the Forex market, a gap is a fairly common phenomenon, and it represents a sharp jump in prices. However, some market participants know little about where such jumps come from, as well as how you can trade on them, because in fact everything here is far from being as simple as it might seem to many at first glance.

The gap itself is the difference between the price that was present at the close of the market on Friday and its subsequent opening on Monday.

Trading strategy

In this case, currency pairs such as GBPUSD, EURUSD, GBPJPY and EURJPY are used. The probability that the gap will close is approximately 70%. It will be possible to start trading approximately half an hour after the market opens at the beginning of the week. Experts recommend such DCs as RoboForex and Alpari to traders.

What is this?

If translated literally, the gap is the difference or gap between quotes on Friday and Monday. In the event that this difference is quite significant, a considerable jump is formed, that is, the price is quite overestimated or underestimated in comparison with the previous one, and this is goodvisible on the charts. It is these gaps that form different types of gaps.

It is quite natural that such gaps do not always appear, but on each pair it can be seen on average approximately once a month. Sometimes less often, sometimes more often, it remains a fact - types of gaps periodically appear, so you can and should make money on them.

Why do they appear?

Gaps are the result of the fact that during the time during which the market remains closed, a sufficiently large number of buy and sell orders accumulate. After the market opens on the night from Sunday to Monday, such orders completely collapse and form a jump.

Of course, this does not always appear, but only if there is a significant difference in sell or buy orders that have accumulated over the weekend. Market makers notice a significant number of sell or buy orders, as a result of which a price appears that has a visually lower or higher value compared to the values of the market at the close of last week. At the same time, it is worth noting a rather important point - in the vast majority of cases, the use of gaps in trading on the Forex market constantly tends to close.

Example

The market opens an order of magnitude higher compared to Friday's close, but at the same time it went up for a certain time, but after that it turned around and started to fall. This situation occurs constantly, that is, after the gap appears, the costbegins to quickly strive to completely close the formed gap.

In other words, if we consider what a gap is and its analysis when the price rises, then the price will then move down as quickly as possible so that this jump is completely blocked. If the difference goes down, then the price will then increase to close this gap.

Why are they closing?

If the market at the opening has too much difference in price compared to Friday, a large number of all kinds of orders appear, as well as pending orders to sell or buy. Accordingly, the stops of each individual order are located not far from the price that was on Friday. In this case, market makers, who perfectly understand what a gap is and what types of gaps exist, start knocking out the stops of these orders that are triggered at the market opening, thus taking money for themselves.

After a complete overlap of the difference, the market can turn in a completely different direction, and there are no definite patterns of this phenomenon. In general, all gaps tend to close as quickly as possible, but it is not uncommon for there to be jumps in prices to open on Monday, but they do not stop, but only continue to grow. Such situations occur only if there is a very, very serious trend movement or if any fundamental factors come into play. For example, this happens if during the weekendthere were some serious changes in the economy. Thus, the definition of a gap suggests that they tend to close, but not always, and this should not be forgotten in the trading process.

How to trade?

It would seem that in this case there is nothing complicated - just sell or buy in the direction of closing the gap after the market opens, that is, there is basically nothing to think about, but in fact everything is far from being as rosy as it might seem at first sight. First of all, do not forget that not all pairs demonstrate the correct development of gaps, and besides this, there are also some patterns in the entries. Also, do not forget that you need to determine the “stop loss,” because it often happens that the price before closing the gap starts moving in the opposite direction.

What to pay attention to?

Far from all trading pairs, you can find really high-quality working out of gaps, that is, closing after they occur. The most optimal statistical indicator (approximately 70%) are the pairs GPBUSD, EURUSD, GPBJPY, EURJPY. The chance of closing the gap on such pairs reaches 70%, and in the case of EURUSD, the chance of closing of all pairs is minimal. Thus, if in this pair the chance is 66%, then in others, as mentioned above, up to 71%.

Thus, if you are interested in what a gap is and what strategies exist for gaps, first of all you will need to track thesefour pairs, and at the same time even completely exclude the EURUSD pair, leaving only three pairs, while not paying any attention to others.

In this case, you can use almost any timeframe, but often experts use M30, where each candle is half an hour. The trading time for the system is carried out only once a week in case of a gap in the market.

How to proceed?

First of all, after Forex opens, you will need to check if there is a jump in price, that is, if there is a significant difference between the closing price on Friday, as well as the price that is present at the opening time on Monday.

If there is a gap, then in this case it should be at least 20 points. In the event that it reaches only 10-15 points, this indicates insignificant fluctuations, and you should not focus on them. In the overwhelming majority of cases, professional traders recommend that a gap of at least 20 points be considered a gap.

You need to enter the market not immediately after opening, but after about half an hour, that is, when the first M30 candle closes. In accordance with the current statistics, during the first 30 minutes, gaps do not constantly tend to close, that is, after such a jump occurs, in the majority of cases it starts to go in its direction, but not in the direction of closing.

How to identify it?

After you figured out whatThe gap in the Forex market, you will need to learn how to determine it. In other words, you will need to determine if the distance between Friday's market closing price is more than 20 pips higher than Monday's opening price. If there is at least such a difference, then it is quite possible to say that the gap has taken place.

Now we need to find an opportunity to get on sale. Half an hour later, we start entering the market after the close of the first M30 candle, and here we need to understand the target and the “take profit” point.

Immediately it is worth noting the fact that the closing point on Friday is not taken into account in this case, but a point is taken slightly higher or lower compared to the last closed candle. That is, if the gap was up, then in this case the nearest point will be higher compared to the value of Friday's close, and the "take profit" point will be set a little higher.

Stop Loss

Now it will be necessary to determine where the "stop loss" is located. As many have noticed, before the desire to close the gap, the price behaves quite chaotically, that is, it starts to go in a completely different direction. This happens for the reason that many people start trying to trade on the closing of gaps, but at the same time, professional market makers try to knock such traders out of the market as efficiently as possible. That is why it is necessary to take into account such fluctuations in the "stop loss" in order not to subsequently fly out of the market, but at the same time ensure a good profitability of the system. Thus, if the stop is too large, then in this case, if 70% of the tot altrades will be profitable, in the end it will be possible to be in the red.

Thus, the "stop loss" should be approximately one and a half times larger than the "take profit" value.

If the stop is larger, then in this case you will simply lose all the profitability of this system, and with a smaller stop value, it can simply be knocked out, as a result of which you will suffer significant losses. If we are not yet very familiar with the concept of a gap in the Forex market, it is worth acting according to this standard. The only thing you can do is round it up and then add a couple more points that will take into account all possible fluctuations.

What will it look like?

In the vast majority of cases, for a certain time, the price does not go in our direction, but at the same time it does not touch the “stop loss”, as a result of which the gap closes. It often happens that gaps close quite quickly, within a few hours, but there are often situations when they remain open for a long time, up to a day. Thus, if the jump was not closed immediately, then there is nothing to worry about, that is, this is a completely normal moment.

Important

In the event that the first M30 candle closed, but at the same time it moved constantly towards the gap, and your distance to the target is very small, such transactions should not even be opened. If you do not have a possible goal before closing at least about 20 points, then it is better not to get involved at all. To the market. Of course, later the market will be able to completely close such a gap, and you will have a profit of 13 points, but in fact it is not worth risking once again, because in this case the goal absolutely does not justify the investment.

This strategy is quite easy, but in most cases it turns out to be profitable for the trader.

Are there any disadvantages?

The disadvantage of this strategy is that the opening of deals will not occur as often as many would like, since gaps do not occur more often than once a week or even a month. But at the same time, in this case, you have a great chance to earn extra money. Of course, you can develop a unique trading strategy, but at the same time, once a week, see if there was a strong jump in price by periodically opening a position using such a system.