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 reality everything here is far from as simple as many might think 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, such currency pairs as GBPUSD, EURUSD, GBPJPY and EURJPY are used. The probability that the gap closes 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 traders such DCs as RoboForex and Alpari.
What it is?
Translated literally, the gap is the difference or the gap between quotes on Friday and Monday. In the event that this difference is quite significant, a considerable leap is formed, that is, the price is quite too high or too low compared to the previous one, and this is clearly noticeable in the graphs. It is such gaps that form the various types of gap.
It is natural that such gaps do not always appear, but on each pair it can be seen on average about once a month. Sometimes less often, sometimes more often, it remains a fact - the types of gaps periodically appear, so you can and should make money on them.
Why do they appear?
GAPs are a consequence of the fact that during the time during which the market remains closed, a rather large number of buy and sell orders accumulate. After the market opens on the night of Sunday to Monday, such orders completely collapse and form a jump.
Of course, this does not always happen, but only if there is a significant difference in the sell or buy orders that have accumulated over the weekend. Market makers notice a significant number of orders for sale or purchase, as a result of which a price appears that has a visually lower or higher value compared to market values at the time of closing 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 is constantly striving to close.
Example
The market opens an order of magnitude higher than Friday's closing, but at the same time it went up for a while, but then turned around and began to fall. Such a situation arises constantly, that is, after the gap appears, the cost begins to strive quickly enough to completely close the gap.
In other words, if we consider what the gap is and its analysis when the price rises, then the price will tend to go down extremely quickly so that this jump is completely blocked. If the difference goes down, then the price will increase to close such a gap.
Why are they closing?
If the market at the opening has a too big difference in price compared to Friday, a large number of all kinds of orders appear, as well as pending orders for the sale or purchase. Accordingly, the stops of each individual order are located near the price that was on Friday. In this case, market makers who are well aware of what a gap is and what types of gap exist, begin to beat out the stops of these orders triggered at the opening of the market, thus taking money for themselves.
After the difference is completely covered, the market can turn in a completely different direction, and there are no specific laws of this phenomenon. By and large, all GAPs tend to close as quickly as possible, but often there are also jumps in opening prices 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 weekend there are any serious changes in the economy. Thus, the definition of the gap indicates that they seek 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 - it’s enough just to 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 reality everything is far from as rosy as it might seem at first glance. First of all, do not forget that not all couples demonstrate the correct development of the gap, and in addition, there are also some patterns in the inputs. Also, do not forget that you need to define a “stop loss,” because it often happens that the price starts to move in the opposite direction before the gap closes.
What to pay attention to?
Far from all trading pairs you can find really high-quality development of the gap, that is, closure after their occurrence. 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 the gap is and what strategies exist on the gap, first of all you will need to track these four pairs, and even completely eliminate the EURUSD pair, leaving only three pairs, while the others generally do not pay any attention.
In this case, you can use almost any timeframe, but often experts use the M30, where each candle is half an hour. Trading time in the system is carried out only once a week in the event of a gap in the market.
How to act?
First of all, after the Forex opens, you will need to check whether there has been a jump in the price, that is, whether there is a significant difference between the closing price on Friday and the price that is present during the opening 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 your attention on them. In the vast 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, the gap is not constantly striving to close, that is, after such a jump occurs, in most cases begins to go in its direction, but not in the direction of closing.
How to define it?
After you understand what a gap in the Forex market is, you will need to learn how to determine it. In other words, you will need to determine whether the distance between the closing price of the Friday market exceeds the opening price on Monday by more than 20 points. If at least such a difference is present, then it can already be said that the gap has taken place.
Now you need to find an opportunity to go on sale. Half an hour later, we begin to enter the market after the close of the first M30 candlestick, and here we need to understand the purpose 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 the point is taken slightly higher or lower compared to the last closed candle. That is, if the gap was up, then the closest point will be higher than the value of Friday's close, and a point “take profit” is set even higher.
Stop Loss
Now it will be necessary to determine where the “stop loss” is located. As many have noticed, before striving to close the gap, the price behaves quite randomly, that is, it begins to go in the completely opposite direction. This happens for the reason that many people start trying to trade at the close of the gap, but at the same time professional market makers try to get 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 to ensure a good profitability of the system. Thus, if the stop is too large, then in this case, if 70% of the total number of transactions are profitable, you can ultimately be in the red.
Thus, the “stop loss” should be approximately one and a half times greater compared to the value of “take profit”.
If the stop is larger, then in this case you simply lose all the profitability of this system, and with a lower stop value it can simply be knocked out, as a result of which you will suffer noticeable losses. If we still do not understand the concept of a gap in the Forex market, it is worth acting according to this standard. The only thing that can be done is to round it and then add a couple more points that will take into account all possible fluctuations.
How will it look like?
In the predominant majority of cases, over a period of time, the price does not go our way, but at the same time does not apply to “stop loss”, as a result of which the gap closes. It often happens that the gap closes quickly enough for several hours, but often there are situations when they remain open for a long time, up to a day. Thus, if the leap was not closed immediately, then there is nothing wrong with that, that is, this is a completely normal moment.
Important!
In the event that the first M30 candlestick closed, but at the same time it moved constantly towards the gap, and the distance to the target is very small, you should not even open such deals. If you do not have a possible goal before the closure of at least about 20 points, then it is better not to enter the market at all. Of course, subsequently the market will be able to completely close such a gap, and you will have a profit of 13 points, but in fact you should not risk it again, because in this case the goal does not justify the invested funds.
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 transactions will not happen as often as many would like, since the gap does 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 to see if there was a strong jump in price, periodically opening a position on such a system.