Gaps in forex are as common as on the other financial markets. Beginners cannot understand what has happened to the price and why it conducts itself in quite a strange way after the position has been left open and a trader has gone to enjoy weekend relaxation. Forex gap trading strategy is sufficient enough, but it is important to understand what gap trading is about and how gaps emerge.
Forex gap trading strategy is sufficient enough, but it is important to understand what gap trading is about and how gaps emerge.
Let’s see what is gap. It can be called ‘white space’ in the chart, or a break that appears due to difference between prices: previous closing price and opening price of the next candle. If you take a look at a line chart, the gap will be represented as a prominent vertical line on it. As it was mentioned before, gaps in forex originate for the reason that Friday and Monday prices differ.
However, to be able to make money on a jump in prices, it is necessary to take certain factors into account.
How to make money on forex gap trading and is it possible at all?
This is apparently an interesting strategy, because this phenomenon as such occurs due to incessant work of the currency market regardless of the traders’ days off. On Monday the market opens at the most marketable price. Gap trading strategy implies the following basic idea: a gap may arise in the course of speculative activities and high volatility; thus, if you open a position in the opposite direction, it is likely (and the probability is high), that it will earn profit within the next few days. However, to be able to make money on a jump in prices, it is necessary to take certain factors into account.
Considerations on gap earnings:
Trading should be done regularly and in compliance with strict rules.
Premature stop-losses and pursuit of them are inadmissible.
The result is to be statistically proven.
You should open positions at the beginning of the week and close them before the week-long session is over.
Give preference to highly volatile currency pairs. The best option is GBP/JPY pair, which is recommended by many traders using this strategy. However, other options will do as well; you can choose any with JPY. Besides, you can apply this strategy simultaneously on multiple pairs.
At the beginning of the week you have to figure out if there is a gap or not. The minimum gap value that suits your needs should exceed the value of an average spread for the chosen pair at least five times. If it does not, this is not a real signal.
A negative gap can happen in case Friday closing is above Monday opening. In such case a long position should be opened.
A positive gap is the opposite: Friday closing is below Monday opening. In such case a short position should be opened.
There should be no take-profits and stop-losses. This rarely happens, but in such case stop-losses should not be applied.
A position should have been closed before the week’s trading session is completed (about five minutes in advance).
Before you try to make money according to this strategy make sure you try it on a demo account first – just like in any other case.
You can choose a forex broker referring to reviews and brokerage ratings.