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When to close a position?

The Gap Close strategy uses two profit targets and a stop loss to protect the position. The first profit target corresponds to half the distance of the gap. The second profit target corresponds to the full distance of the gap. Traders tend to open positions which can be split into two, resulting in an equal position size for each profit target. Other split ratios than 50/50 are possible. These can be set, as usual, in the Designer dialog.

The stop loss is a fixed stop. This stop is in essence a safety net as it is placed relatively far from the entry price (default ticks).

What to do when the target(s) are not reached and the stop is not triggered? Manually close the position on Wednesday.

The example shows a short sell signal on the EUR/NZD. Half of the position is closed when the first target (half the gap, green line) is reached. The other half of the position is closed when the market closes the gap. The red line indicates the stop order.

Gaps in the Forex market help traders identify price movement clues, entry and exit signals, and trend reversals. In simple terms, gap trading is a disciplined approach to buy and sell assets. You can benefit from volatile markets in asset prices or gaps and turn these gaps into trading opportunities. Let's take a deep dive into what gaps are and how you can make the most of gap trading:

What is gap and gap trading?

A gap refers to the difference between the currency pair opening price and the previous day’s closing price. Any sharp upward or downward movement in the currency pair price can be termed as a gap. In gap trading, the traders find currency pairs that open at a higher price or an extremely low price than its previous day’s closing price, monitor its movement, and make a trade. Gaps can be identified as candlesticks on the Forex chart pattern, and sharp price movements are notably visible with low liquidity in the trading volume. Here’s how you can identify gaps:

• Look for strong support and resistance levels in the market
• If there is a strong resistance level and the currency pair price moves beyond that level before coming back to its original position, it signals to sell the currency pair
• If there is a strong support level, and the currency pair price moves below this level before coming back to its original position, it signals to buy the currency pair and limit losses

Four main types of gaps you need to know

1. Breakaway gaps

Breakaway gaps identify the strongest support and resistance price levels. They generally mark a trend reversal while moving out of a current trend.

2. Common gaps

Common gaps refer to a non-linear drop or jump from one currency pair price to another. As the name suggests, these gaps are the most common gaps to witness.

3. Exhaustion gaps

Exhaustion gaps occur when a steep decline in a currency pair’s price happens after a rapid increase. This gap signals traders that there is now a fall in the demand for the currency pair.

4. Runaway gaps

Runaway gaps in the Forex market occur in the middle of an existing trend. It occurs in the trend’s direction and is a gap that exceeds 5% of the currency pair’s price.

Top four gap trading strategies for Forex traders

1. Full gap trading strategy

The full gapping trading strategy occurs whenever a currency pair opens at a price that is above and beyond the previous day’s closing price. Full gaps indicate a strong market sentiment shift and send entry and exit signals to the traders.

• Whenever prices open beyond the previous day’s high price, it sends a long position or buy signal
• When prices drop below the opening price in the first trading hour, it sends traders a sell or short position signal
• Any sharp decline in the prices when compared to the previous day’s closing price and a day before’s low price, signals traders to place a long position order
• When a currency pair opens below the previous day’s lowest price, it sends a signal to the traders to short the trade immediately

2. Partial gap trading strategy

The partial gapping trading strategy occurs whenever the currency pair’s opening price moves beyond or below the last day’s closing price. But the opening price remains within the last day’s pricing range. The partial gap trading strategy allows traders to place trailing stop orders of around 6%.

• Whenever the currency pair opens beyond the previous day’s closing price, but below the previous day’s high price, it sends traders a signal to buy more of the currency pair
• Whenever the price for the current day is lower than the previous day’s closing price, it sends traders a buy signal
• Whenever the currency pair opens at a price less than the previous day’s closing price, it signals traders to short the trade

3. End of day gap trading strategy

The end of day gap trading strategy involves the traders scanning and reviewing the currency pairs at the end of the trading day to analyse which ones have the best potential. Since the Forex market functions 24 hours a day, from Sunday to Friday, the end of the day for Forex traders is P.M. EST on Fridays. The volatility during this hour sends a strong indication to traders about the continued movement in the market along the gap’s direction.

• Whenever the currency pair price witnesses a gap that goes beyond the resistance level, it sends the traders an entry signal for the upcoming next week
• Whenever the prices witness a gap that moves below the support level, it sends the traders an exit signal in the market for the upcoming new trading week

4. Modified gap trading strategy

In a modified gap trading strategy, a trader places positions in the middle of a market trend. The only requirement to trade the modified gap trading strategy is that the currency pair must be trading twice (at least) the average trading volume since the last five trading days.

• Whenever a currency pair opens at the previous day’s highest price, it sends the traders a buy signal. The price for the long or sell order should be equal to the average of the high price and opening price for the current day’s first trading hour
• Whenever the price opens at less than the previous day’s lowest price, it sends a sell signal. The price for the long or sell order should be equal to the average of the low price and opening price for the current day’s first trading hour

Gap trading strategies to use in your trades

Trading the currency pair price’s gap enables you to identify potentially profitable positions. Blueberry Markets is a trading platform that delivers all the charts and informational material about different Forex trading strategies that you can apply to maximise your profits and minimise your losses. Sign up for a live trading account or try a risk-free demo account.

If you&#;re a price action trader, you might be familiar with a concept that has been making the rounds lately called the Fair Value Gap. In this article, we&#;re going to talk through the basics of what a Fair Value Gap is, show some examples of how to think about using it in your trading, as well as how to scan for it on the TrendSpider platform. Let&#;s dig in.

Understanding Fair Value Gap

Before we get into how to utilize the Fair Value Gap indicator in your trading, let&#;s first talk through what a Fair Value Gap is.

Fair Value Gaps are most commonly used amongst price action traders and are defined as instances in which there are inefficiencies, or imbalances, in the market. These &#;imbalances&#; simply suggest that buying and selling are not equal.

Fair Value Gaps are created within a three-candle sequence and are commonly visualized on the chart as a large candle whose neighboring candles&#; upper and lower wicks do not fully overlap the large candle.

The reason why a trader might be interested in where these Fair Value Gaps occur is simply that the imbalance created by them can become a magnet for price in the future.

The Fair Value Gap Indicator

Like any other indicator on the TrendSpider platform, the Fair Value Gap indicator can be added to your charts by selecting it within your indicators button. Once added, it will highlight all Fair Value Gaps on your chart with blue horizontal shaded areas, as is pictured in the image below.

Trading A Fair Value Gap

In the example pictured below, we see a high made that is then followed by a strong sell-off. The first large red candle after the high is where the Fair Value Gap is created. Price trades down, begins to make a bottom and then climbs back up to test the previous high that was made. As soon as the fair value gap is filled, price sells off again. This would be an example of price filling to the upside in order to clear out the imbalance made from the Fair Value Gap. Once the gap is filled, there is no longer an imbalance and price can continue in the direction it was headed previously and a secondary down move occurs.

In the example pictured below, we see the opposite of the above example. A Fair Value Gap is created due to strong buying pressure. Price trades up, begins to top out and then pulls back into the Fair Value Gap. This clears out the imbalance that was made from the move up, and almost immediately after the gap is filled, price is able to continue quite higher.

Scanning Fair Value Gaps

Though it is not possible at this time to use the Fair Value Gap indicator in the scanner, it is still possible to scan for Fair Value Gaps using price action criteria. As we defined earlier in the blog, Fair Value Gaps are formed via a three-candle sequence in which a large candle&#;s neighboring candles&#; upper and lower wicks do not fully overlap the large candle. Add these customs scans to identify Fair Value Gaps as they form!

Building A Fair Value Gap Scanner

In the instance of a Fair Value Gap being created due to large buying pressure, we would use the following criteria:

• eunic-brussels.eu (last) is greater than eunic-brussels.eu (2 candles ago) &#; This defines the lack of overlap between candle wicks
• eunic-brussels.eu (1 candle ago) is greater than eunic-brussels.eu (1 candle ago) by at least &#;x %&#; &#; This defines the large buying pressure
• eunic-brussels.eu (1 candle ago) is greater than eunic-brussels.eu  (2 candles ago) &#; This defines that the candle with the buying pressure closed above the high of the previous candle

In the instance of a Fair Value Gap being created due to large selling pressure, we would use the following criteria:

• eunic-brussels.eu (last) is less than eunic-brussels.eu (2 candles ago) &#; This defines the lack of overlap between candle wicks
• eunic-brussels.eu (1 candle ago) is less than eunic-brussels.eu (1 candle ago) by at least &#;x %&#; &#; This defines the large selling pressure
• eunic-brussels.eu (1 candle ago) is less than eunic-brussels.eu (2 candles ago) &#; This defines that the candle with the selling pressure closed below the low of the previous candle

The below image shows these parameters scripted into the TrendSpider scanner.

If you&#;re a current TrendSpider user, you&#;re welcome to subscribe to this shared Fair Value Gap Scanner. Do keep in mind that this scanner looks for Fair Value Gaps that were created both to the upside and the downside. If you&#;d like specific scanners for each direction, save the condition groups and create your own! Additionally, feel free to create your own copy and adjust the parameters as you see fit.

So there you have it, folks. Some basic ways to be thinking about how to utilize The Fair Value Gap in your technical analysis and within the TrendSpider platform. We hope you found this helpful and we&#;d love to hear how you&#;re using this indicator! Feel free to reach out to us in chat with any questions or thoughts that you might have.

A gap is nothing but an empty space formed between two successive candles (or bars) representing a change in the exchange rate of a currency pair. Generally, when a candle gets completed according to the time frame used by a Forex trader, the next candle will open such that there will be an overlap of the closing price of the completed candle and the opening price of the new candle. However, in a gap formation, there will be a huge gap between the closing price of the completed candle and the opening price of the new candle. The new candle can form above or below the completed candle as shown in the figures below.

An example of a positive Forex gap:

An example of a negative Forex gap:

Why Does Gap Form?

A gap formation occurs when the sentiment turns extremely bullish or bearish towards a currency (or any other asset). Gaps can occur in any timeframe and can happen at any time. However, Forex markets being highly liquid, gaps are formed usually at the beginning of a new trading week.

When there is a sudden change in the sentiment, buyers or sellers would make a frantic attempt to enter or exit a position. That would create a price gap on the upside or the downside. If the sentiment has turned bullish all of a sudden, then Forex traders having a short position in a currency would try to outbid each other, thereby creating a huge price gap on the upside.

Likewise, if the sentiment has turned bearish suddenly, then Forex traders having a long position would compete to exit at the earliest, thereby creating a huge price gap on the downside. Unexpected economic or political news causes a change in the sentiment required to produce big currency rate gaps.

For example, back in April , when Theresa May, the Prime Minister of the United Kingdom, announced snap election, a majority of market participants anticipated a huge victory for the Conservatives. Surprisingly, Theresa May and her party lost the majority, and the election resulted in a hung parliament. That dampened the sentiment towards the Great Britain pound, thereby leading to a negative gap opening in the GBP pairs.

It is not uncommon to see the price reverse at some point in time and close a gap created previously. However, there is no guarantee that it would happen. Even in the case of a price reversal, there is no definite time frame for the gap to be filled. Depending on the strength of the underlying sentiment, a gap may be filled within a day, week, after several months, or never at all.

Depending on the nature of formation, gaps can be grouped into four categories.

Breakaway Gap

A breakaway gap can be seen at the beginning of a big price movement and at the end of a consolidation phase of a currency pair. Since such gaps are formed when a currency pair breaks out of a non-trending pattern to a trending pattern, it is referred to as a breakaway gap.

The GBP/USD pair formed a breakaway gap on June 8, , following the exit polls' prediction of hung parliament in the UK.

Runaway or Continuation Gap

It is formed around the middle of an uptrend or downtrend of a currency pair. Since the trend remains unchanged after the formation of the gap, it is one of the most reliable patterns to trade with. The image below shows a continuation gap formed by the EUR/USD pair on April 23,

Exhaustion Gap

An exhaustion gap is usually seen in the final leg of a downtrend or an uptrend. The pattern is confirmed on the basis of low volumes. The EUR/RUB chart below shows an exhaustion gap formed few days before the second round of the French election, conducted on May 8,

Common Gap

A common gap is formed when an overwhelmingly positive or negative news is announced. For example, retail sales, unemployment change, NFP, and GDP growth data can result in the formation of common gaps. When IHS Markit reported a lower than anticipated flash manufacturing PMI (US) on March 24, , the USD/CAD pair made a common gap pattern as shown in the chart screenshot below. Earlier that day, Statistics Canada had reported better than expected core CPI data.

It would be an interesting opportunity to create trading strategies once you become well experienced in identifying price gaps and their nature as they form on the chart.

If you want to get news of the most recent updates to our guides or anything else related to Forex trading, you can subscribe to our monthly newsletter.

As the forex market operates continuously throughout the week, the closure during the weekend can result in a discrepancy between the closing price on Friday and the opening price on Sunday. Below we delve into the dynamics of the weekend gap trading strategy in forex, a tactic that many traders utilize to harness profit from this particular market characteristic.

Defining Weekend Gaps

Forex trading is known for its 24/5 activity, following the business hours of the world's major financial centers. At the end of the New York trading session on Friday, the forex market draws to a close and only reopens with the Sydney session on Monday. During this time, currency prices are susceptible to change due to many factors, such as emerging geopolitical events, newly-released economic data, or other significant news that can move the markets. When the trading resumes, if the opening price differs markedly from Friday's closing price, a "gap" is said to have occurred.

The Theory Behind Weekend Gap Trading Strategy

The weekend gap trading strategy has gained traction among forex traders eager to capitalize on these price discrepancies. The primary premise of this strategy is the market's propensity to attempt to fill the gap, meaning that the price will endeavor to return to the Friday closing point. Therefore, traders strive to initiate positions as soon as the market opens on Sunday, banking on the price reversal to close the gap.

Executing Weekend Gap Trades

To proficiently trade weekend gaps, there are several vital steps to consider:

Identify the Gap

The first task at the market opening on Sunday is to ascertain whether a substantial gap has formed between the closing price on Friday and the opening price on Sunday.

Initiate the Trade

If a gap exists, the next step is to place a trade in the direction that anticipates closing the gap. For instance, if the opening price on Sunday is higher than the closing price on Friday (an upward gap), a short position would be the appropriate move, predicting a decline in the price to close the gap.

Timing is vital, as entering too early will likely result in a loss. An opening gap will initially result in some traders who held positions on Friday needing to exit with a loss. To profitably trade this pattern, wait until the stop loss orders are finished to enter a position. If the market suddenly moves in one direction and then quickly starts to move in the reverse, it could be a sign that the stop loss orders are finished and a good entry point.

Determine Stop Loss and Take Profit Points

A simple risk management strategy is to set your stop loss below the opening of the Monday price and a target at Friday's close. More advanced traders will use trailing stops to reduce risk and look for opportunities to extend profits should the market return to Friday's close.

Supervise the Trade

After placing the trade, it's vital to monitor it closely. Depending on the market's volatility, gaps can close quickly or gradually. Sometimes, the gap may not close during the upcoming trading week, and this can lead to significant losses if you do not exercise caution, as many other traders will be stuck with a similar losing position.

Risks of Gap Trading

While weekend gap trading can present lucrative opportunities, it is crucial to be mindful of the associated risks:

Non-Closing Gaps

Not all gaps close. Some gaps linger open for an extended period, leading to drawn-out periods of negative return. Do not assume all gaps will close. Weekend news events can be important and start new price trends which can continue for a long time.

Slippage

The forex market can exhibit considerable volatility during the opening on Monday. Slippage can occur, meaning your orders may be executed at a different level than you've set. Be patient with your entry point and avoid chasing the market.

Risk of Wide Gaps

Over the weekend, major events or news releases can trigger unusually wide gaps, which might exceed your risk tolerance. Wait until the market calms down to reduce your risk.

Integrating Risk Management in Gap Trading

Incorporating effective risk management techniques is a crucial aspect of weekend gap trading. Here are some ways to safeguard your trading activities:

Risk Per Trade

Each trade should only risk a small fraction of your trading capital, typically no more than %.

Correlation Risk

If you're trading gaps on several currency pairs that are closely correlated, you should be aware of the correlation risk.

News Awareness

Stay updated about significant news events over the weekend that could catalyze extensive gaps. News analysis can be complicated as analysts will have varying views on the importance of an event but never underestimate the power of market news on Forex prices.

Backtesting and Demo Trading Your Gap Trading Strategy

It is essential to test any new strategy before implementation. Begin by backtesting the gap trading strategy against historical data, and then practice it in a demo account to observe how it performs under real-time market conditions. This will allow you to assess its effectiveness and adjust based on your observations.

The Psychology of Gap Trading

A less discussed but equally important aspect of gap trading is trader psychology. It requires patience to wait for the market to open and see if a gap forms. Emotional control is crucial once a trade is initiated, as the price may move against you before the gap starts to close. Sticking to your predetermined stop loss and taking profit without succumbing to fear or greed can often be the difference between success and failure in gap trading.

Conclusion

Weekend gap trading is a potentially very profitable strategy that capitalizes on the pause in the forex market. While it can offer substantial profits, it's crucial to understand the associated risks and employ effective risk management strategies.

What Is a Stock Gap?

A stock gap is an area discontinuity in a security's chart where its price either rises or falls from the previous day’s close with no trading occurring in between. Gaps are common when news causes market fundamentals to change during hours when markets are typically closed, for instance, an earnings call after-hours.

Understanding a Stock Gap

Gaps typically occur when a piece of news or an event causes a flood of buyers or sellers into the security. It results in the price opening significantly higher or lower than the previous day’s closing price. Depending on the kind of gap, it could indicate either the start of a new trend or a reversal of a previous trend.

Gapping occurs when the price of a security or asset opens well above or below the previous day’s close with no trading activity in between. Partial gapping occurs when the opening price is higher or lower than the previous day’s close but within the previous day’s price range. Full gapping occurs when the opening is outside of the previous day’s range. Gapping, especially a full gap, shows a strong shift in sentiment that occurred overnight.

Some traders make it a strategy to profit from playing the gap when such a situation occurs.

There are limitations despite gaps being easy to spot. The glaring flaw is one's own ability to identify the different types of gaps that occur. If a gap is misinterpreted, it could be a disastrous mistake causing one to miss an opportunity to either buy or sell a security, which could weigh heavily on one's profits and losses.

Types of Stock Gaps

There are some fundamental differences between the different types of gaps: common gaps, breakaway gaps, runaway gaps, and exhaustion gaps.

• Common Gap: In general, there is no major event that precedes a common gap. Common gaps generally get filled relatively quickly (usually within a couple of days) when compared to other types of gaps. Common gaps are also known as "area gaps" or "trading gaps" and tend to be accompanied by normal average trading volume.
• Breakaway Gap: A breakaway gap occurs when the price gaps above a support or resistance area, like those established during a trading range. When the price breaks out of a well-established trading range via a gap, that is a breakaway gap. A breakaway gap could also occur out of another type of chart pattern, such as a triangle, wedge, cup and handle, rounded bottom or top, or head and shoulders pattern.
• Runaway Gap: A runaway gap, typically seen on charts, occurs when trading activity skips sequential price points, usually driven by intense investor interest. In other words, there was no trading, defined as an exchange of ownership in security, between the price point where the runaway gap began and where it ended.
• Exhaustion Gap: An exhaustion gap is a technical signal marked by a break lower in prices (usually on a daily chart) that occurs after a rapid rise in a stock's price over several weeks prior. This signal reflects a significant shift from buying to selling activity that usually coincides with falling demand for a stock. The implication of the signal is that an upward trend may be about to end soon.

Each type of gap has certain consequences for traders. For example, reversal or breakaway gaps are typically accompanied by a sharp rise in trading volume, while common and runaway gaps are not. Additionally, most gaps occur due to news, or an event such as earnings or an analyst's upgrade/downgrade.

Common gaps happen more regularly and do not always need a reason to occur. Also, common gaps tend to get filled, whereas other gaps may signal a reversal or continuation of a trend.

Examples of a Stock Gap

In the example below of eunic-brussels.eu Inc. (AMZN), a small stock gap occurred between Oct. 26, , and Oct. 27, , when the price jumped from $ to $ This was a reversal of a downward trend which saw the stock's price continue to climb.

In the next example, of Alphabet Inc. (GOOGL), a gap can be seen from Oct. 24, , to Oct. 25, , when the price fell from $ to $ after weeks of a general price increase. The gap drop did not result in a continued downward trend, instead, the price continued to increase to its pre-gap level, filling the gap.

The Bottom Line

Price movements of an asset indicate to traders when it might be a time to buy, sell, or ignore what is happening in the market. Gaps, such as stock gaps, are large jumps in a security's price during non-trading hours due to external factors, such as news. When evaluating the gap, traders and investors need to determine the cause before taking any action.