Gap Trading

The Forex

How To Profit from a Forgotten

Trading Strategy that is “Right”
89.1% of the Time…

Special Report
By Jason Fielder, Founder - ForexImpact.com

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 Fill the Gap in Your Forex Trading with a Secret
that is “RIGHT” 89.1% of the Time
By Jason Fielder

The trade no one is talking about in the Forex Market; that can make you money
month after month.

Gap trading has been around for decades in the stocks and futures markets, but
it’s largely ignored by most active traders in the Forex despite its incredibly high
accuracy rate. Before I get into WHY that is, I want to first discuss the concept of “gap
trading”.

Here’s how gap trading works: Anytime you see a change in price levels between
the close and open of two consecutive bars on a chart, a “gap” has occurred. Traders use
these gaps to predict short-term movements, and they’ve proven over the years to be
highly accurate indicators in almost every major market.

A Forgotten Art

But if gaps are such an easy (and profitable) way to trade the markets, why have
they been largely ignored among Forex traders? Simple. Without a market close there’s
no opportunity for gaps to occur. In the past I’ve observed gaps when there was a
massive move in one of the pairs as well as very small, almost random gaps, but unless
you’re staring at a tick chart you probably won’t see them. These gaps are not tradable
because the gaps are too small and the spreads are too large to make a profit.

No, to trade the gaps effectively you need a close, and as you’re no doubt aware
the Forex almost never closes.

And unlike stock and commodity markets which close at the end of day, the Forex only
closes down Friday night through Sunday night. So while most markets offer gap trading
opportunities at the end of every day, you can really only trade the gaps once a week in
the Forex. Then again, when gaps do occur they produce an accuracy of 89.1%, so their
worth the wait.

How To Trade Gaps In the Forex

As I’ve already stated gaps are a change in price levels between the close and
open of two consecutive bars on a chart. (For our purposes, the gaps we are looking for
occurs between the closing price on Friday to the opening price on Sunday.)

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 There are only three things that the price can do from Friday’s close:

- Open above Friday’s close, called “gapping up”

- Open below Friday’s close, called “gapping down” or…
- Open at the same price as Friday’s close, where there has been “no gap”.

When a gap occurs in the Forex market, it can be a partial gap or a full gap. A
partial gap occurs when the opening price is higher or lower than the previous closing
price; but does not gap beyond the high or the low of the previous bar. Another way of
saying it is that the gap has occurred within the high/low range of the previous bar.

Example of Partial Gaps

A partial gap up occurs when the opening price is less than the high price of the
previous week. As you can see below, the arrow points to a partial gap up.

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 Example of a partial gap down:
A partial gap down occurs when the opening price is greater than the low price of
the previous week. The arrow shows where the partial gap down occurred.

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 Examples of Full Gaps

A full gap occurs when the opening price opens beyond the previous bars
high/low range. A full gap up has an opening price higher than the previous bars high. A
full gap down has an opening price lower than the previous bars low.

The example below of a full gap up occurs when the opening price is greater than the
high price of the previous week. The arrow indicates where the full gap occurred.

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 The example below of a full gap down occurs when the opening price is less than
the low price of the previous week. The arrow indicates where the full gap down
occurred.

Example of full gap down:

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 Variables in Forex Gap Trading

The research that I have conducted on Forex gaps has shown that there is little to
no difference when trading the partial gap compared to full gaps.

The other interesting variable that I tested was which direction to trade the gaps.
Do you buy into the direction of the gap or sell against the direction of the gap?

For example, if the EUR/USD gaps down 20 pips; then do I buy or sell? I have
found that whichever direction the gap occurs, you need to trade in the opposite direction.

So:

- If the currency pair gaps up then sell short.

- If the pair gaps down then buy.

I conducted the majority of the research on the four major pairs (EURUSD,
GBPUSD, USDCHF, USDJPY).

Benefits of Gap Trading

There are several nice things about trading gaps in the Forex market. I like the
fact that the market opens on Sunday night at 5:00 pm EST. This gives you a chance to
put on a trade before the work week begins. This trade is also easy to spot and there is
nothing that can be interpreted wrong. There is either a gap or not.

When a gap occurs you can place your stop loss and exit; then let the trade run.
There is no reason to watch the market, unless you just want to.

YOUR HOMEWORK:
This coming Sunday night at 5:00 pm EST on the open of the
Forex market watch for a gap to trade. If the pair gaps up
sell short and if the pair gaps down then buy. Better
still, scroll back on your Daily chart, and check out how
often this happens (I think you'll be surprised!!)

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