A gap is ... A trading strategy based on a gap

In the Forex market, a GAP is a fairly common phenomenon, and it represents a sharp jump in prices. However, some market participants do not know much about where such jumps come from, and how they can trade on them, because in reality everything is not so simple as many may seem at first glance.

The gap in itself is the difference between the price that was present at the moment of the market closing 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 be closed is about 70%. It will be possible to commence trading approximately half an hour after the market opens at the beginning of the week. Experts recommend traders such DC, like RoboForex and Alpari.

What it is?

If you translate verbatim, GEP is the difference or the gap between quotations on Friday and Monday. In the event that this difference is quite substantial, a considerable leap is formed, that is, the price is sufficiently overestimated or underestimated in comparison with the previous one, and this is clearly seen from the graphs. It is these gaps that form the various types of GAPs.

It is only natural that such gaps appear not always, but on each pair it can be seen on average approximately once a month. Sometimes, less often, sometimes more often, it is a fact - the types of GAPs are periodically manifested, so they can and should be earned.

Why do they appear?

Gaps are a consequence of the fact that during a period during which the market remains closed, a large number of orders for purchase and sale accumulate. After the market opens on the night of Sunday to Monday, such orders completely collapse and form a leap.

Of course, this does not always happen, but only if there is a significant difference in the sales or purchase orders that accumulated during the weekend. Market makers notice a significant number of orders for sale or purchase, resulting in a price having a visually lower or higher value than the market values at the close of the previous week. At the same time, it is worth mentioning a rather important point - in the majority of cases the use of GEPs in trading on the Forex market is constantly striving for closure.

Example

The market opens up an order of magnitude higher than the Friday's close, but at the same time it went up for a certain time, but after that it turned around and began to fall. This situation arises constantly, that is, after the GEP appears, the cost begins to quickly enough to completely close the gap that has been formed.

In other words, if we consider what a GAP is and its analysis with an increase in the price, then the price will move extremely quickly downward so that this jump is completely blocked. If the difference goes down, then the price will increase to close such a gap.

Why do they close?

If the market at opening has too big a difference in price in comparison with Friday, there is a plenty of every possible orders, and also the pending orders for 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 perfectly understand what a GAP is and what types of GAPs exist, begin to knock out the stops of these orders that trigger at the opening of the market, thus taking the money away.

After completely closing the difference, the market can unfold in an entirely different direction, and there are no specific patterns of this phenomenon. In general, all GEPs tend to close as quickly as possible, but there are often jumps in prices for the opening 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 whether any fundamental factors come into play. For example, this happens in the event that during the weekend there were some serious changes in the economy. Thus, the definition of GEP indicates that they are trying 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 difficult - it is enough to simply sell or buy in the direction of closing the gap after the market opening, 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, we should not forget that not all couples demonstrate correct working out of GEPs, but in addition, there are also some patterns in the entrances. Also, do not forget that you need to determine "stop loss," because it often happens that the cost before closing the gap begins to move in the opposite direction.

What should I pay attention to?

Far from all trading pairs, one can find a really qualitative development of GAPs, that is, closures after their occurrence. The most optimal statistical indicator (approximately 70%) are pairs GPBUSD, EURUSD, GPBJPY, EURJPY. The chance of closing GEP on such pairs reaches 70%, and in the case of EURUSD the chance of closing out 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 these four pairs, and even completely exclude the EURUSD pair, leaving only three pairs, while for others in general 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. The trading time for the system is only once a week in the event of a gap in the market.

How to act?

First of all, after Forex opens, it will be necessary to check whether there was a jump in price, that is, whether there is a significant difference between the closing price on Friday, and the price that is present at 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 do not focus on them. In the majority of cases, professional traders recommend to consider the gap as a gap not less than 20 points.

Enter the market should not immediately after opening, but in about half an hour, that is, when the first M30 candle closes. In accordance with the current statistics, for the first 30 minutes, gaps do not always tend to close, that is, after such a jump occurs, in the majority of cases starts to go in his direction, but not toward closure.

How to define it?

After you understand what the 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 there is at least such a difference, then it is already possible to say that the gap has taken place.

Now you need to find an opportunity to get into the sale. Half an hour later we start to enter the market after the closing of the first M30 candle, and here we need to understand the purpose and the point of "take profit".

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

Stop Loss

Now you need to decide on where the "stop loss" is located. As many noticed, before the attempt to close the gap, the price behaves chaotically enough, that is, it starts to go absolutely the other way. This is so because many people start trying to trade at the closing of GEPs, but professional market makers try to knock out such traders as efficiently as possible. That's why you need to take into account such fluctuations in the "stop loss" in order to subsequently not 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 if 70% of the total number of trades are profitable, you can end up in the negative.

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

If the stop is more, then in that case you will simply lose all profitability of the given system, and at a smaller value of the stop it can simply be knocked out, so you will suffer appreciable losses. If we are not yet fully versed in the concept of GEP in the Forex market, it is worthwhile to act on this standard. The only thing you can do is round it and then add a couple more points that will take into account all possible fluctuations.

How will it look like?

In the majority of cases, for a certain time, the price does not go to our side, but it does not concern the "stop loss", so that the gap closes. It often happens that GEPs close quickly enough for several hours, but often there are situations when they remain uncovered for a long time, up to a day. Thus, if the jump was not immediately closed, then there is nothing to worry about, that is, it is quite a normal moment.

Important!

In the event that the first candle M30 was closed, but it was constantly moving towards the gap, and the distance to the goal you have very little, such transactions do not even need to be opened. If you do not have a possible goal before closing at least about 20 points, then it's better not to enter the market at all. 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, you should not risk it once again, because in this case the goal absolutely does not justify the invested funds.

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

Are there any shortcomings?

The downside of this strategy is that the opening of transactions will not happen as often as many would like, since gaps arise no more often than once a week or even a month. But 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.