View Full Version : How to Trade Gaps in the Forex Market

06-27-2013, 12:24 AM
The forex markets are closed for the weekends. The weekend for the forex markets run from Friday evening to Sunday evening GMT. Now, it often happens that the price at which currency pair opens on the Sunday evening is different from the price it had closed on the Friday evening. This difference between the Sunday open and the Friday close price is known as the Gap in Forex Trading.

Now usually this gap between the Sunday open and the Friday close is something like 20 pips but occasionally it can be as wide as 200 pips. This can happen if there was a sudden shocking breaking news during the weekend. Due to these gaps in the forex market, it is always advisable to close any open trades that you had before the Friday close. In other words don't try to keep your positions open during the weekends.

The good thing is that these gaps tend to get closed within some hours of the Sunday open. However, sometimes these gaps can take as long as 24 hours or even more to get closed. Trading these gaps is a valid forex strategy that many savvy traders use to make quick pips with low risk.

One gap trading strategy can be to first locate a gap on a forex pair and then just buy/sell at the Sunday open with the take profit at the Friday close. But the risk in this strategy is this that the market can go the other way round before it comes back to close the gap. Meaning the market can further widen the gap before it makes a turn to fill the gap.

In order to overcome this problem, savvy traders use candlestick reversal patterns before they trade these gaps. So, first you will locate the gap then you will wait for the appearance of a solid candlestick reversal pattern like the Bullish or Bearish Harami or a Bullish or Bearish Engulfing Pattern or a Hammer. The appearance of these candlestick reversal patterns confirm that the price has reached the top or the bottom and is not going to further widen the gap. Plus you use these candlestick patterns to place the stop loss. Always remember never ever trade without a stop loss. These candlestick reversal patterns in most cases will give you a much better price as compared to just buying/selling at the Sunday Open plus a solid place to place the stop loss.