Forex Gap Trading Plan – Part 1

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.

The Sunday Forex gap trades have been among my most consistently profitable trading strategies. In this short series I will explain what the gaps are and show you my strategy, tips and advice on trading them.

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?

A gap is a price area on a chart 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 gaps?

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 gaps 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 trade-able or not.

See you next Asia session,
Tim Black
Secret Asian Man 😉

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  • forex market

    raph, it sounds like u dont know what is forex market, forex market of the world never closes, the gap is only for us(that is retail clients) , not for everyone [morgan stanley and barclays will still trade on sundays and saturdays], interbank trading happens all the time .oanda is the biggest broker in the world. if u dont know anyting ask to google

  • Raph

    Oanda is probablly a “dealing desk/market maker” broker – i.e., they take the opposite side of your trades – as opposed to an ECN/direct market access brokers (like MB Trading, perhaps). That's probablly why they never close, whereas the interbank market DOES close @ 5 PM eastern time on Fridays… So the only explanation as to where those “after hours quotes” are coming from is that the broker is making them up. A lot of these FX brokers a nothing but modern day versions of ol' school bucket shops Jesse Livermore got banned from. Watchout!

  • YankeeClipper1

    Hi Tim, Nice looking start to the PLAN, can't wait for the other parts.
    I trade with Oanda. The only problem I have in trading “after hours”, as it were, is the massive pip spread increase. EUR/USD as an example, goes from 0.9 pips to around 10.00 pips or more (in some cases). This (for the uninitiated) means I'd have to gain 10 pips in order to start at £0.00. This can be quite a move for the smaller traders.

    May all your pips be profitable

    Mike aka YankeeClipper