Forex Gap Trading Strategy

The forex gap trading strategy is an interesting price action trading system that is based on a phenomenon known as the forex gap.

This gap trading strategy is based on the daily timeframe and you don’t need any forex indicators for this.

If you don’t know what a forex gap is, I will also explain it here.

 

What Is A Forex Gap?

A forex gap happens when the opening price of candlestick is not the same as the close of the previous candlestick.

So there’s a empty space or gap between the close and opening as seen on this chart below:

Forex Gap Definition

In the forex market, gaps are not as frequent as in the share market. The gaps in forex tend to happen when the market closes on Saturday and Opens On Monday.

In the share market, share traders are known to trade gaps because it is much more common.

The Concept Of Gap Trading

There is a reason why trading of gaps occur. The main idea or concept of gap trading is that price will always try to fill the gap.

Why Is that?

Well, for one, it is said that because there is no support or resistance in the gap, price has freedom and room to move inside the gap.

 

Why Causes Forex Gap?

The forex gap itself takes its origin in the fact that the interbank currency market continues to react on the fundamental news during the weekend, opening on Monday at the level with the most liquidity.

Therefore when you open your trading charts on Monday, you can see a  gap.

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Does Price Always Fill The Forex Gap?

I have not done any analysis on this so I wound’t say yes or not but from a few charts that I’ve seen, price does seem to fill the forex gaps.

But…how soon it fills the gaps may worthwhile investigating.

Generally it is assumed that for gap trading to happen, price must fill the gap on the next day etc.

 

Forex Gap Trading Strategy Rules-How To Trade Forex Gaps

  1. You need to choose a currency pair with a high level of volatility. GBPJPY is a good example but any currency pair that forms a weekend gap should also be good.
  2. When the trading day starts on Monday, look to see if there is a gab. Make sure that the gap is at least 5 times the average spread for the pair. For example, if the spread is 3 pips, make sure that the gap is  15 pips or above. Anything less would be considered irreverent
  3. If you see that Monday’s candlestick open is below the Friday’s close then the  forex gap is negative and you should open a Long position at market price.
  4. If you see Monday’s open is above the Friday’s close the forex gap is positive and you should open a Short position at market price.
  5. You can apply two stop loss options: (a) apply no stop loss at all INITIALLY but as price moves in favor by say 50 pips, place stop loss above high or low of the Monday Candlestick when it closes (b) Place stop loss above/below nearest swing high/swing low the you can find in 1hr timeframe or 4 hour timeframe.
  6. Just 5 minutes before the forex market closes on Saturday, (e.g., 5 minutes before the end) you need to close your trade.
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Here’s and example of forex gap trading and how many pips made when the forex gap was filled:

Forex Gap Trading Strategy

Additional Notes About Gap Trading In The Forex Market

The forex gap trading strategy is an very simple and interesting price action trading strategy but here is the big issue with it:you will not get many forex gap trade setups if you are just trading a few currencies.

Remember you only check for gaps once a week, on Monday. So if you strategy is only gap trading, there will be weeks where you will not get gaps and there will be weeks where you will get gaps that you can trade.

Therefore I suggest, checking all the currencies you can find on your charts for gaps on Monday (or Sundays on some brokers) so that there’s a lot more chance for you to find opportunities to trade forex gaps.

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References/Resources

1: Forex Gap Strategy: http://www.earnforex.com/forex-strategy/forex-gap-strategy/

2: Is Gap Trading In Forex Profitable https://www.forex4noobs.com/forex-blog/forex-tips/is-gap-trading-in-forex-profitable/