Forex Gap Trading Plan – Part 4

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.

In Part 1 of this series, we discussed what the gaps are, how and why they form, and what you need to take advantage of them. In Part 2 we discussed how you, the trader, can determine where the gap is and whether a trade is possible. In Part 3 we discussed my rules and suggestions for entering a gap trade. In Part 4 we will discuss how to manage the gap trade.

EURUSD Gap May 9, 2010

Once you are in your gap trade, you should manage it just as you would manage any other trade. Initially, your first target will be one-half of the gap fill.  Don’t be foolish about this, though.  If you start seeing the market turn against you (IE. a five-minute buy signal), take half of the profit and run the rest of the trade at break even (IE. move your stops to your entry so the second half of the trade is a free ride.)  If the market moves against you a significant amount and stops out your second half, it’s OK. Just re-enter the trade on another sell signal.

Be sure to take your stop loss if price action goes against you. You can always re-enter the trade when it goes your way again.

Watch the price action as it approaches the one-half gap fill point.  If you see a shortening of thrust and a reversal before that point, close a slice and run the rest at break even. Don’t let it come within a few pips of your target and not take some profit.

If price action is approaching your target with momentum (wide range bars – moving fast), don’t take your first profit until you see it slowing down or bouncing.

If you keep entering and getting stopped out several times, it may be that price action is just wacky and whippy.  There’s nothing wrong with standing aside and living to trade another day.  If you miss a move, it’s OK. There WILL be another move you can get into.  Don’t blow your account on nasty price action.

When price action approaches the gap fill, watch it very carefully.  Many times it will take a hard bounce off the gap close level, so be prepared to close the trade quickly at that point.  Many times it will bounce and go a long way against you, so you will want to be out if you see that happening.

Trading the Forex gaps on Sunday night can be very profitable.  Watch price action very carefully and ALWAYS remember to maintain your risk parameters.  Trading is not about making the big score, it’s about being consistent and protecting your trading account.

If you are a Premium member of Winners Edge Trading, follow me on Twitter (@IsItCoffeeYet) and I will let you know if and when I’m opening the trading room to trade the gaps on Sunday.

See you in the trenches,
Tim Black
Secret Asian Man 😉

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