How to Trade Gaps from the Beginning

[Livornese 10]

Hello,

 

Did you see the gap of this week in EUR/USD? 100 pips gap!

 

Let's start with a bit of annoying theory first (you can skip this part as this material is not examinable). Forex gaps occur when on any currency pairs the opening price at the start of the week is different from the closing price of the previous week. This is due mostly because the majority of our retail brokers are closed during weekends and they do not update their charts till the opening of a new week. As you can imagine when brokers are closed the world still goes on and so prices on currencies change. A gap simply shows the not updated weekend candles on the chart. Gaps can present themselves also during the week when lack of liquidity, volume or a sudden news released provoke the price to jump. In my experience with Forex the weekend gaps are more frequents and visible than the latter.

 

OK what happens next? Well most of the time gaps are filled! I would even say either on the same day or on the same week - please note that I said most of the time, not always as everything can happen in forex so please don't bet your grandma's house in one go, just do it little by little.

 

I put you here below a link where I wrote an article about Gaps. If you wanna check it out please do it. This article is part of a contest and if I get your views I get points so for me it would be really appreciate it. I hope you don't find it as a span as at the end of the day I put a lot of effort on it.

 

here is the link:

 

http://www.dukascopy.com/fxcomm/fx-article-contest/?action=read&article=Alice-In-Wonderland-down-The-Rabbit&id=168

 

I forgot to say...

When I see Gaps (on Monday morning - European time) I take note of it and check how many pips is the Gap large. I then check the price action of the pair (I personally trade EUR/USD) and see how willing it is to go towards the trend direction (this week bearish trend). For example, the price action of the first three days of this week was telling me that no matter what before going to its bearish trend it must have closed the gap. Having in mind that I was buying at lows on Monday, Tuesday and Wednesday. Last night after the gap filled I put myself superduper bearish (my target was 1.34 that I got it today :-).

Lucky? Maybe! The secret here is to have in mind that gaps are a powerful thing in forex and they are loved and used by a lot of traders. In relation to how many pips should your stop loss be it's difficult to answer as everybody has a different style of trading. I personally look at price action and decide my stop loss in base of it and in base where I start my trading (usually trying to buy on pullbacks and sell on spikes) I wouldn't be too worry to trading style as this definitively will come after hours and hours of trading and a good use of money management :-)

 

For your reference I attached the EUR/USD 4H chart as it is today (22nd September 2011)

[Tradewinds 12]

This article is part of a contest and if I get your views I get points so for me it would be really appreciate it. I hope you don't find it as a span as at the end of the day I put a lot of effort on it.

 

There is a section in Traders Laboratory for article's. Why don't you just post the article here? You won't get points, but you'll get thanked if people find it useful. Why are you in a contest to get points? What do you get?

[Livornese 10]

Hi TradeWinds! Thanks for your suggestion I didn't know about Laboratory article section. I'll see if I can transfer this thread over there. For your other questions at the end of the contest you get some money to trade...

[Livornese 10]

This week the Gap in EUR/USD has been closed too early unfortunately but it was perfectly filled again.

 

Oh well at the moment I'm buying dips but don't follow as I can revert any moment

[PiP.Squeak 10]

I've watched the Gaps for a long time and I've seen them close about 99% of the time. I have about a 5% success ratio picking the bottom/top. It seems that often the momentum of the trend has a significant impact on when the reversal occurs. I've had better success when I wait until the 50 EMA on a 15Min chart either flattens out or reverses before placing a trade.

 

I've been stopped out many times trading the first reversal thinking "It can't go that much further before it turns and closes the gap" :crap:

 

I've even stacked them up as the market moved away from the gap. Thinking "If the trade was good at 25 PiPs, it should be better at 45." It's a lot easier to trade when your 97% sure which way its going sooner or latter, its a lot harder not to get in to deep before the reversal!

 

They can be good trades if you get in at the right time!

 

I'd really like to hear more from all the experts out there about how you determine when to take the trade.

[henryduncan12 10]

Hi TradeWinds! Thanks for your suggestion I didn't know about Laboratory article section. I'll see if I can transfer this thread over there. For your other questions at the end of the contest you get some money to trade...

 

Yes really it was very good fortune that it filled again .

[Marubozu 10]

Wait for a 50% retracement and buy! It's one of the few things I do regularly with great success and seems to work on all instruments.