How to trade Gaps (with irony)

[Eldiablofx]

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-a...-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 :-)

[Enivid]

Do you have some statistics regarding the gaps filling or is it just your general intuition that's telling you so?

[Eldiablofx]

Hi Enivid,
I don't have statistics as I'm really dumb in back testing programs...on the other hand I wouldn't call it general intuition as in more than 3 years watching at charts (why the hell I chose to get hooked in this? ) I noticed that Gaps most of the time are filled.

Let's see next week (I look at EUR/USD) if we have a gap and see if it will be filled.

[Enivid]

Yeah, I also see most of the time the gaps are filled. The biggest problem for me when I was trying to trade gaps was to set the stop-loss. Where do you set your stop-losses for the gap-filling positions?

[Eldiablofx]

Hi Enivid!

Unfortunately there is not a straight answer to your question as you can see nobody knows when Gaps are filled. On the other hand Gaps help me to better understand the price action and be more conservative in my leverage when I want to trade in the opposite direction of an open gap...

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

[Enivid]

Nice! Do you trade gaps only on EUR/USD or do you use this strategy on other pairs as well?

[Eldiablofx]

I personally trade only EUR/USD.

But Gaps are gaps and are generally filled in all pairs

[Easy Trader]

How do you enter on the gaps, I tried this before but had 50-50 success. I would place a order a few pips into the gap( assuming that if price got into the gap it would close it) but kept getting triggered in and price would reverse and hit my SL. Price did come back and fill the gap most of the time though. Is there something you look for in the actual gap setup itself, or maybe the price behavior approaching the gap???

[Enivid]

Maybe he isn't placing stop-losses?

[Easy Trader]

Originally Posted by Enivid

Maybe he isn't placing stop-losses?

Maybe!, they usually do close, but sometimes it takes a very long time and a huge drawdown