Gaps are a technical analysis term used to describe price movements in financial instruments where the opening price is higher or lower than the previous closing price. Trading gaps occur when there is a significant change in the supply or demand of an asset, leading to a sudden price increase.

In the forex market, gaps can occur not only over the weekend but also between each trading day during the week, ranging from small to large. Gaps may arise for various reasons, such as significant news or events, changes in market sentiment, or shifts in the fundamental aspects of assets. However, weekend gaps are often of more significance in practical trading.

Specifically, a company announcing better-than-expected earnings results may cause its stock price to gap up, while negative news such as major lawsuits or market crashes can lead to a gap-down in stock prices. Additionally, gaps can occur due to technical factors like stop-loss orders or margin calls.

The forex weekend gap trading strategy involves identifying price gaps and trading based on the expected price movements after the gap.

This article will use a real example to illustrate the details of forex weekend gap trading. Whether you are an experienced trader or just entering the trading field, reading this article will provide you with a more comprehensive understanding of forex weekend gap trading.

Forex Weekend Gap Trade in EURUSD

Below, you will see a price chart for the Euro to US Dollar currency pair within a 15-minute time frame.

It is evident from the left side of the chart that the price of the Euro against the US Dollar is on an upward trend. While the upward trend may not be apparent in this section of the price chart, retracing the timeline backward reveals the existence of an actual upward trend. Furthermore, the chart indicates that prices within this range are significantly higher than the 200-period simple moving average (MA), further confirming that the Euro is in an upward channel.

After some overlapping price trends seemingly form a wedge pattern, the market tends to create a downward gap. This downward gap occurs against the backdrop of an upward trend in the market. Therefore, referring to the analysis in the previous article titled “Forex Weekend Trading | Tutorial with Weekend Gap Strategy,” based on our forex weekend gap strategy trading rules, this would be a tradable opportunity.

In the current scenario, the size of the downward gap is 24 pips, falling within our preferred gap size range (minimum 20 pips, maximum 40 pips). Once this downward gap forms in the market at the opening of the Sunday night session in Eastern Time, we will execute our predetermined trading strategy.

The specific steps are as follows:

Enter a market order to buy the Euro against the US Dollar.

Set the stop-loss line to be 24 pips below the opening price. The size of the gap is represented by an upward vertical bracket, while the measurement of the stop-loss is indicated by a downward bracket, with this level marked by a black horizontal dashed line.

Set the target price to be 1 pip below Friday's closing price. This level is represented by a green dashed line near the top of the chart.

Following our plan, after the weekend gap opens, the price should almost immediately start consolidating, with demand increasing, ultimately driving the price up to Friday's closing level. In reality, our target was achieved just one day after the market opened, and the entire gap was filled, resulting in a profitable trade.

It's worth noting that once the weekend gap is filled, supply begins to enter the market, pushing prices lower. We often see this scenario occur after the weekend gap is filled. In other words, after a weekend gap-down, Friday's closing price often acts as a resistance level. On the flip side, after a weekend gap-up, Friday's closing price often serves as a support level.

Steps to Develop a Gap Trading Strategy

Based on the above example, we can summarize the general approach to developing a gap trading strategy. Before investing your hard-earned money in gap trading, it's essential to follow these steps and utilize tools for implementation.

Identify Gap Types

As mentioned earlier, not all gaps are the same. Identifying gap types can help you determine potential trading strategies.

Analyze Trading Volume and Activity Levels

High trading volume during a gap can indicate strong investor interest and the potential beginning of a new trend.

Use Technical Analysis Tools

Tools such as support and resistance lines, moving averages, and oscillation indicators can help confirm your analysis and provide additional trading signals.

Manage Your Risk

You can use stop-loss orders to limit your potential losses. Avoid taking risks beyond what you can afford to lose.

Key Factors Evaluated in Gap Trading Strategy Development

Market Conditions

The effectiveness of a gap trading strategy depends on the overall market conditions. For example, in volatile markets, price gaps may occur more frequently, providing more trading opportunities.

Risk Tolerance

Gap trading carries inherent risks, and it is crucial to consider your own risk tolerance when formulating a strategy.

Trading Experience

Gap trading can be complex and requires a good understanding of technical analysis. If you are a beginner, you may want to gain more experience before attempting gap trading.

Pros of Forex Weekend Gap Trading

Profit Potential

One of the main advantages of Forex weekend gap trading is the potential for substantial profits. When a gap occurs, it signifies a sudden shift in market sentiment. If you can accurately predict the direction of the gap, you have the opportunity to gain significant profits in a short period. Forex gaps can offer traders a quick and lucrative return on investment.

Harnessing Market Volatility

Forex gaps often come with an increase in market volatility. This volatility can bring more trading opportunities and the potential for higher profits. Volatile markets tend to provide better trading conditions for active traders who can take advantage of short-term price fluctuations. Traders adept at analyzing market trends and patterns can benefit from the increased volatility during Forex gap periods.

Applicability of Technical Analysis

Forex gaps can provide traders with valuable technical analysis information. Traders proficient in using technical analysis tools and indicators can benefit from clear breakouts of price levels occurring during gap periods. This breakout can confirm existing trends or indicate potential trend reversals.

Enrich Your Trading Strategies

Forex gap strategies can be incorporated into various trading approaches. Some traders prefer engaging in gap fill trades, where they hold positions expecting prices to fall to fill the gap. Others may choose to trade the continuation of the gap, anticipating prices to continue moving in the direction of the gap. When executed correctly, both strategies can be profitable, providing traders with flexibility in their trading methods.

Cons of Forex Weekend Gap Trading

Risk of Prediction Failure

While Forex weekend gaps can offer profitable trading opportunities, there is always the risk of market trends contradicting your predictions. If a trader builds positions based on the continuation of the gap, there is a possibility of price reversal, filling the gap. Failure to timely implement a stop-loss in the event of a prediction failure can lead to significant losses.

Limited Trading Opportunities

Forex gaps do not occur every week. Their frequency is often lower compared to other trading setups. This means that traders may have limited opportunities to capitalize on Forex gaps. Traders need to exercise patience and wait for the right setups to occur.

Market Manipulation

Forex gaps can sometimes be caused by market manipulation. Large institutional traders or central banks may intentionally create gaps to trigger stop-loss orders or manipulate market sentiment. These gaps can be unpredictable and pose a challenge to trading decisions. Traders engaging in Forex gap trading need to be cautious and vigilant to avoid falling victim to market manipulation.

High Volatility Risks

While increased volatility can provide trading opportunities, it also comes with higher risks. Sharp price movements during Forex gap periods may lead to slippage and increased trading costs. Traders need to be aware of the potential risks associated with market volatility and adjust their trading strategies accordingly.

FAQs

Is volume and activity important in gap trading？

In gap trading, volume is a crucial indicator. Gaps accompanied by high volume often signal stronger price movements compared to those with low volume. High volume during gap periods indicates strong investor interest and may suggest the beginning of a new trend. Conversely, low volume may indicate a lack of conviction, and the gap may be filled quickly.

Are all gaps always filled？

Not every gap is always filled. The filling of gaps depends on various factors, including market conditions, the time frame of trading, and when you enter the market to fill the gap.

How often do gaps occur in forex trading？

To understand the frequency of gap occurrences, examining historical data is a good starting point. Differences exist between currency pairs, but on average, it can be fair to say that forex price gaps occur approximately once every 5 weeks.

Bottom Line

In conclusion, forex weekend gap trading offers traders a flexible approach with the potential for significant profits along with some challenging aspects. Before employing this strategy, traders need to consider market conditions, risk tolerance, and personal experience to formulate an effective gap trading strategy.

Whether you are a novice or an experienced trader, gaining a comprehensive understanding of forex weekend gap trading through the examples and principles discussed in this article can provide valuable insights for your trading decisions.