How To Earn On GAP’s?

Hello, friends! At the opening of the Forex market on Monday, there are often significant price hikes, which are called GAPs. GAP literally means gap, jump. In this post we will talk about how to find these jumps, where they come from and analyze a strategy of trading on the GAPs (it’s not that simple as it might seem).

GAP is the difference between the price of closing of the Forex market on Friday and price of opening it on Monday.

Strategy of Trading on GAPs

Currency pairs: EURUSD, GBPUSD, EURJPY, GBPJPY
Probability of GAP closing ≈ 70%
Timeframe: М30
Trading hours: half an hour after the market opens early in the week
Recommended Brokers: RoboForex

What is GAP?

First of all, let’s find out what is GAP?

If translated literally, GAP is the gap, the difference between quotations on Friday and opening of the market on Monday. And if the difference between the closing price on Friday and opening on Monday is significant, then there is a jump. That is, the price can be significantly higher or lower than the price that was on Friday and this is clearly seen on the chart as in the example below:

We can see that the closing price on Friday was about 1.25155, and the opening price on Monday was 1.25671. That is nearly 51 pips higher than the closing price of the market on Friday:

And this gap, which is formed between the price of market closing on Friday and price of opening on Monday, is called GAP. Naturally, the gap is formed not always. On average it can be seen on each pair once a month. Sometimes more often, sometimes less often, but the fact is that GAPs happen and you can earn on it.

Why do GAPs happen?

GAPs arise because at the time when the market is not active, namely, on the weekends, there accumulates a certain number of orders for sell and buy. And when the market opens at night from Sunday to Monday, these orders collapse and create a gap, as we saw on the previous chart.

This, of course, does not happen always, but only when there is a significant advantage in order to buy or sell, accumulated over the weekend. Market makers see a huge number of orders to buy or sell and, accordingly, we have price that visually is higher or lower than the value of closing on Friday. It is worth noting one important point. GAPs, as a rule, tend to close.

Let’s consider the example:

The market opened on Monday significantly higher than it closed on Friday. Some time it was moving up and then it turned around and moved down. This situation happens all the time and after a GAP appeared, the price generally tends to close the resulting gap.

That is, if there was a GAP up, then the price will tend down to cover the jump. But if there was a GAP down like at the picture below, the price will tend up to close this gap:

Why do Gaps tend to close?

The fact is that when the market opens significantly higher or significantly lower than the price of Friday, a lot of pending orders to buy or sell is activated. Of course, Stops of these orders are located close to Friday’s closing price. And thus market makers strive to knock out the Stops of those guys whose orders worked on the opening of the market and take their money.

Once the GAP was closed, the market can move at any direction. There are no special regularities. In general, the Gaps tend to close, but sometimes there is a jump in the prices of opening on Monday, and it continues. This only happens when there is a strong trend movement or some fundamental factors enter into the matter. For example, something could happen in the economy over the weekend. That is, the GAPs tend to close, but not always. Keep this in mind!

How are we going to trade on GAPs?

It would seem, just buy or sell in the direction of closing the Gap on the market opening and that is all. And there’s nothing to think about. But everything is not so simple. First, not all pairs show a good development of GAPs, and secondly there are certain regularities in entries. Besides, you need to determine the Stop loss. As the price often moves in the opposite direction before closing of GAP.

Not all currency pairs show good development of GAPs, i.e. the closure after their appearance. Pairs of EURUSD, GBPUSD, EURJPY, GBPJPY show the best statistical indicator, approximately 70%. Probability of closing GAP on these pairs is 70% approximately. And probability of closing of EURUSD is the least of these 4 pairs. It is about 66%, while probability of closing of the remaining pairs is about 70-71%.

That is, to trade GAP closure, we should follow these four pairs. It is even possible to exclude EURUSD and follow only three pairs. And we shouldn’t pay attention to the other pairs.

We can use any timeframe, but we will look at the M30 chart. Each candle will be half an hour. A little later I’ll explain why. Time of trading is once a week, if there is a GAP.

First, after the opening of the market we examine, whether there is a GAP. Is there a significant difference between the closing price on Friday and the opening price on Monday?

GAP, if any, shall be not less than 20 pips. If it is 10-15 pips, it is rather insignificant fluctuation. You shouldn’t pay attention to it. We assume that GAP is a gap of 20 pips or more.

We will enter the market not immediately when it opened, but after the first M30 candle will be closed i.e. half an hour after the market opens. Why is it so? Statistically, during the first 30 minutes, GAPs usually are not seeking to closure. After GAP occurred, in most cases, the market for the first half hour goes in the direction of GAPs. And not in the direction of its closure.

So, the market opened:

First we check whether our gap is the GAP. Is the distance between the closing price of the market on Friday and the opening price on Monday more than 20 pips? If there are at least 20 pips, then we can assume that this GAP was held. In this case, on the chart, the GAP was 51 pips:

So it can be considered for a full GAP. After opening of the market, we don’t open our order immediately in the direction of closing of GAP.

In this case we must look for the opportunity to enter into the market. We will enter the market only half an hour later as soon as the first candle M30 is closed, the first M30 candle after the opening of the market. In the picture below you can see that here it was closed and we will enter the market approximately where the red line is on the chart:

What is our target? What is our point of taking Takeprofit?

We will not take the point of closure on Friday. We take a point slightly above High or Low of the last closed candle on Friday. In this case, since the GAP was moving up, the high point of the last closed candle on Friday is closer for us and we put Takeprofit just above this point:

Just above the high point of the last closed candle on Friday. Thus the target in our trade is 46 pips:

Next we need to determine Stop loss. As you probably noticed, before seeking to closure of GAP, the price does strange things and often moves wrong direction. Why does it happen? Because so many traders are trading at the closing of GAPs and market makers are attempting to remove these know-alls from the market. Therefore, we need to take into account such fluctuations in our Stop loss, so they couldn’t knock us out of the market, and at the same time we could maintain the overall profitability of the system. So, if the Stop is too large, we can be in the red even with a 70% of profitable deals.

So, we will determine Stoploss based on the value of Takeprofit multiplied by 1,5:

TP * 1,5

If we put stop loss higher, we will lose profitability of the system. And if we put it lower, multiply by 1,4, then Stoploss is knocked out very often. And we will suffer losses.

Let’s return to our example and measure our target. Takeprofit is equal to about 46 pips:

We multiply 46 by 1,5 and get 69

We round it up to 70 and add a couple of pips to some random fluctuations and obtain 72-73 pips. That is, our Stop loss in this trade will be around here:

As you can see, the price for some time was moving not in our direction, but it did not touch Stoploss and eventually GAP was filled. Gaps sometimes close quickly, within a few hours after the market closed, and can stay open for quite a long time, up to one day. So if the GAP is not closed immediately, then there is nothing wrong with that. This is normal.

Very important moment!

If after the first candle M30 closed, but it was moving in the direction of the GAP and the distance to the target is very little, as in the case below:

It is better not to open such trade. If there is no possible target before the closure of at least 20 pips, the best decision is not to enter the market. Of course the market can close that GAP, and you will receive a profit of 17 pips, but the risk doesn’t worth it, because the end does not justify the means.

Let’s look at another example:

But this time we have a GAP that is moving down. We will consider buying. We measure the opening of the market on Monday and see that it is 49 pips:

We may classify it as a full GAP.

Then we wait for the first candle M30:

As you can see the market is not always moving in the direction of the Gap in the first half hour, sometimes it can move in the direction of its closure. The first half hour we do nothing and wait for the first after opening the M30 candle is closed and once it is closed we enter the market:

We set our target just below the low point of the last closed candle on Friday:

Why do we put our target not on the closure of the market, but just above the low point? Because the market strives to close GAP, but does not want to close it with precision to the point of closure on Friday. Very often the price does not reach quite a bit before market close on Friday and unfolds. That is, we define our target about near the market closure on Friday, but not exactly. Thus we increase our chances of making a profit.

Now we have to set Stoploss. Remember that we define it by multiplying TP by 1,5. We measure Take profit and get the value in 29 pips:

We multiply it by 1,5 and get a 43,5 and add a couple of pips to random vibration. Our Stop loss in this trade will be 46-47 pips:

As we can see on the chart, the price some time was in flat. It almost stood still. But then GAP was successfully closed, and we went out of the market:

This is such an easy and at the same time profitable strategy!

It’s disadvantage is that we can not open the trades as often as many of us would like. Because, as I wrote earlier, GAPs occur maximum once a week. And sometimes once a month. But it is a great opportunity to earn extra money. You can trade using your own strategies and at the same time once a week you can look whether there is a GAP.

And if it appears, you can open a position by this system and make a profit!