Part 1 will explain what the gaps are, how and why they form, and what you need to take advantage of them.
Part 2 will explain how you the trader can determine where the gap is and whether a trade is possible.
Part 3 will show my rules and suggestions for entering a gap trade.
Part 4 will show how I manage my gap trades.
What is a gap?
Gaps in forex charts are the price area over which price action has jumped. In other words, no trades took place in the price area. A gap can be caused at any time by fast market action, but for our purposes, I will be referring to the gaps that occur between some brokers’ closing on Friday afternoon and opening on Sunday afternoon.Statistically, gaps are screaming to get filled. Since price action is a result of traders’ action and traders generally expect gaps to fill, then they do fill. The Sunday afternoon gaps don’t always fill on Sunday. Recently a gap of over 160 pips in the EURUSD opened on Sunday afternoon and was not filled until the following Thursday. But often a partial fill will occur on Sunday afternoon or evening and that is where we hope to take some profit.
How are the gaps formed?
The Forex market closes at 5 pm Friday afternoon (all times mentioned in this series are US Eastern Time.) Often, finance ministers and central banks will release meeting minutes and other data on Friday after market close and Saturday. A lot of market-shaking news can be broadcast during this time.When significant news is released, the market starts moving early on Sunday afternoon and gets more volatile as 5 pm approaches. Most brokers open trading at 5 pm on Sunday. Some start their data feeds earlier. The gap is formed between the broker’s close on Friday (some brokers close at 4 pm, others at 5 pm) and that broker’s opening at 5 pm on Sunday (some open earlier, others later.) The gap is due to other trading taking place on Friday afternoon after the given broker has closed trading and on Sunday afternoon before the given broker has opened for trading.
What do I need to take advantage of the Sunday afternoon gap?
Primarily you will need a broker that opens early enough to take advantage of the closing of the gaps. I have seen the market gap early, start closing around 4 pm and completely close the gap before 5 pm. If I was trying to trade the forex weekend gap with a broker that opens at 5 pm, I would have totally missed that trade. That having been said, you can still have successful gap trades if your broker opens at 5 pm. Any later than that and you may want to open an account with another broker so you can consistently trade the gaps.My primary Forex broker is FXCM UK, but their trading doesn’t open until 5 pm. Because of that, I still maintain a small account with Oanda. Apparently, Oanda doesn’t close at all. You can enter trades on Saturday if you like. If the gaps start to close early, I will take the trades in my Oanda account. I don’t make as much (the account is quite a bit smaller than my FXCM account), but at least I get to take advantage of an early gap close. If the gap turns to close after 5 pm, I will take the trade in my FXCM account.
I am not specifically recommending any particular broker, I’m just letting you know how I do this.
In the next part of this series, I will explain how to determine where a Forex gap has opened and how to determine whether it’s tradeable or not.
See you next Asia session,
Tim Black
Secret Asian Man
Tim Black hosts the live trading room for the Asia trading session. His background is in computers and technology. He is addicted to technology, charts, and technical analysis and enjoys teaching and sharing his viewpoints in these areas.
