Forex Gap Trading Plan – Part 3

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 will discuss my rules and suggestions for entering a gap trade.

EURUSD Gap May 9, 2010

Entering the gap trade is fairly straightforward.  Assuming for the moment that the market has gapped up, after 4 pm start by watching for a “shortening of thrust” near a prior resistance area on a five-minute chart.  A shortening of thrust appears as wider range candles that are progressively narrowing as price action approaches the resistance area. Next watch for a confirmed five-minute sell signal (two bar reversal signal – price action closes below the prior bar on a five-minute chart) preferably with a wide range reversal bar.  This is the point at which you are going to place your short order AFTER quickly determining there is sufficient room for you to profit on one-half the gap fill.  You should have identified this go/no-go point when you determined whether the gap was trade-able.

At this point, enter your trade with a market order placing your stop loss above the current figure (the place at which price just turned.)  I usually allow two pips plus the spread (if you use a bid chart and you’re going short, you will need to include the spread in your exit.)  If your stop loss gets hit, just look for the next opportunity to get into the trade. Last week, I was stopped out of two of the pairs, re-entered higher up and made quite a bit of profit as a result.

Just reverse the above instructions if the gap is down.

Please remember that trading is thin at this time of day and can be whippy. Also remember that NOTHING is 100% sure when trading markets, so do not overload on your trades.  No matter where the gap may be, the market will do what the market is going to do and cannot be predicted, so maintain your normal risk parameters.  I have seen the gap close in a matter of minutes but I’ve also seen it continue to move and stay open for days and even weeks.

In part 4, we will discuss how to manage your gap trades and pull profit out.

See you Sunday night,
Tim Black
Secret Asian Man 😉

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