How to trade on gaps? - Grand Forex Systems


Home Top Ad

How to trade on gaps?

 In this article, we will learn what a gap in Forex is and how to trade profitably on them. Many traders, seeing a gap on the chart, skillfully apply some actions to make a profit. There are dozens of trading strategies on the Internet that allow you to make money on gaps. Here we will look at a profitable trading strategy used specifically on gaps for the foreign exchange market and not on stocks or commodity futures.

Usually, for inexperienced traders, Forex gaps are scary and cause them to stop doing any trading on the currency pairs where they are observed. Due to inexperience, Forex traders open deals in the direction of not working out gaps, and accordingly, in most cases, they observe a drawdown on the deposit. But if you understand how to trade on them, trades can be closed with a profit. This article will look at different situations with gaps in currency pairs and tell you how you can act in a given situation.

What is the gap in Forex?

Here we will explain what a gap in trading is? Within the technical analysis framework, a gap is a gap in the flow of quotes on Forex. In other words, on the chart, a gap is a significant gap between one closing price and the opening price of the next price. It is simply impossible to confuse gaps with other formations on the chart.

Win-win Forex strategy for gaps

First of all, this trading system will be applied to the hourly charts of all currency pairs.

The gap can often be observed at the beginning of the week. This price gap occurs because on Friday closer to midnight the price closes at one price, and on Monday after midnight, during the Asian session, it opens at a completely different price. However, this price gap is significant even though when the Forex market is on the weekend, the bearish and bullish sentiment develops. Therefore, on the chart on Monday, one can observe rapid price jumps.

All gaps are divided into three types:

  • Continuation
  • Breakdown
  • Exhaustion

In fact, it is not difficult to identify one type of price gap or another. All you need is the look and direction of the dominant trend line that was last week. That is, before the onset of the gap.

For example, in case of a sideways trend and a gap, the price went beyond it, then this type of gap can be considered a breakout. When a gap in Forex follows the dominant trend, it is a continuation.

If the gap is directed in the opposite direction from the trend, this is exhaustion. This type of price gap indicates a loss of strength in price movement and a possible trend reversal.

Identifying false signals when trading on gaps

Gaps can form from the middle of the week. However, this trading strategy is intended for trading on gaps that form from the beginning of the week, that is, from Monday.

Important: You should always check the gap in Forex before applying any special trading tactics to it. In the past few years, some unscrupulous brokers have been drawing price gaps. In other words, if you see a gap, then check its presence not with one broker but with several. If only one broker has it, and the others do not have it, it should be considered false.

After the trader has made sure that the gap on Forex is really not false but quite real, you can start waiting. This is one of the basic conditions of a trading strategy. Waiting time: 1-4 hours. Then, for trading on Forex gaps to be truly profitable, you need to adhere to 4 basic rules:

  • All gaps should be considered within the Simple Moving Average (SMA) indicator set on the chart. So, if the gap is up when the SMA is also up, this is a trap. With a high probability, after such a gap, the price will move in the opposite direction. And if you start buying, then this can lead to the triggering of the Stop Loss.
  • If the gap and the SMA are directed downwards, this is also a trap for the trader. It is not worth getting up in short positions because you can catch the Stop Loss in the same way as in the first case.
  • If the SMA is directed down, and the gap is up, then this is a good signal and the trader knows how to trade gaps under such conditions since the price that has reached the resistance line is likely to go down. Therefore, a trader can open an order to get the maximum profit.
  • In the case when the SMA is directed upwards and the gap is directed downwards, you can open a long position. This can only be done when the price reaches the support level.

So, let's summarize the main points of gap trading. The trader should only pay attention to price gaps formed at the beginning of the trading week, not those that appeared in the middle of the week, from Tuesday to Friday. It is also important to follow the four basic rules mentioned above. Also, you must be able to distinguish between false and real gaps.

Strict adherence to four basic rules allows you to distinguish between correct signals and false ones. The opening of positions is assumed in the presence of a positive signal and only a few hours after the trading week's opening.

When a gap has arisen in Forex, you do not need to open an order in one direction or another immediately, and you should wait a few hours to see where the price will go next. Even if one week was profitable, there is no guarantee that the next week will be profitable. When opening an order, watching a gap in Forex, remember that the deposit must be of such a size to withstand a possible drawdown. If you follow all the rules, risks are minimized, and the possibility of making a profit increases by order of magnitude.

The above examples will help traders in Forex trading when price gaps occur and become a good checklist that allows you to weed out unprofitable or false gaps.