How to trade Gaps!

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Livornese

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Hello,

Did you see the gap of this week in EUR/USD? 100 pips gap!

Let's start with a bit of annoying theory first (you can skip this part as this material is not examinable). Forex gaps occur when on any currency pairs the opening price at the start of the week is different from the closing price of the previous week. This is due mostly because the majority of our retail brokers are closed during weekends and they do not update their charts till the opening of a new week. As you can imagine when brokers are closed the world still goes on and so prices on currencies change. A gap simply shows the not updated weekend candles on the chart. Gaps can present themselves also during the week when lack of liquidity, volume or a sudden news released provoke the price to jump. In my experience with Forex the weekend gaps are more frequents and visible than the latter.

OK what happens next? Well most of the time gaps are filled! I would even say either on the same day or on the same week - please note that I said most of the time, not always as everything can happen in forex so please don't bet your grandma's house in one go, just do it little by little.

I put you here below a link where I wrote an article about Gaps. If you wanna check it out please do it. This article is part of a contest and if I get your views I get points so for me it would be really appreciate it. I hope you don't find it as a span as at the end of the day I put a lot of effort on it.

here is the link:

Forex Article Contest :: Dukascopy Bank SA | Swiss Forex Bank | ECN Broker | Managed accounts | Swiss FX trading platform
 
I forgot to say...
When I see Gaps (on Monday morning - European time) I take note of it and check how many pips is the Gap large. I then check the price action of the pair (I personally trade EUR/USD) and see how willing it is to go towards the trend direction (this week bearish trend). For example, the price action of the first three days of this week was telling me that no matter what before going to its bearish trend it must have closed the gap. Having in mind that I was buying at lows on Monday, Tuesday and Wednesday. Last night after the gap filled I put myself superduper bearish (my target was 1.34 that I got it today :).
Lucky? Maybe! The secret here is to have in mind that gaps are a powerful thing in forex and they are loved and used by a lot of traders. In relation to how many pips should your stop loss be it's difficult to answer as everybody has a different style of trading. I personally look at price action and decide my stop loss in base of it and in base where I start my trading (usually trying to buy on pullbacks and sell on spikes) I wouldn't be too worry to trading style as this definitively will come after hours and hours of trading and a good use of money management :)
 

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Livornese said:
I forgot to say...
When I see Gaps (on Monday morning - European time) I take note of it and check how many pips is the Gap large. I then check the price action of the pair (I personally trade EUR/USD) and see how willing it is to go towards the trend direction (this week bearish trend). For example, the price action of the first three days of this week was telling me that no matter what before going to its bearish trend it must have closed the gap. Having in mind that I was buying at lows on Monday, Tuesday and Wednesday. Last night after the gap filled I put myself superduper bearish (my target was 1.34 that I got it today :).
Lucky? Maybe! The secret here is to have in mind that gaps are a powerful thing in forex and they are loved and used by a lot of traders. In relation to how many pips should your stop loss be it's difficult to answer as everybody has a different style of trading. I personally look at price action and decide my stop loss in base of it and in base where I start my trading (usually trying to buy on pullbacks and sell on spikes) I wouldn't be too worry to trading style as this definitively will come after hours and hours of trading and a good use of money management :)
Click to expand...

A lot of guys know about this. Did you sell it when it filled, to go short?
 
brettus said:
A lot of guys know about this. Did you sell it when it filled, to go short?
Click to expand...

Hi, Yes of course! My sell order was at 1.3780 with stop loss at 1.3845.
I know that a lot of guys know about this, but it's useful sometime to remind that Gaps are a really good tool ;) All the best!
 
so they fill "most" of the time...do they reverse most of the time when closed also ??
 
Livornese said:
I forgot to say...
When I see Gaps (on Monday morning - European time) I take note of it and check how many pips is the Gap large. I then check the price action of the pair (I personally trade EUR/USD) and see how willing it is to go towards the trend direction (this week bearish trend). For example, the price action of the first three days of this week was telling me that no matter what before going to its bearish trend it must have closed the gap. Having in mind that I was buying at lows on Monday, Tuesday and Wednesday. Last night after the gap filled I put myself superduper bearish (my target was 1.34 that I got it today :).
Lucky? Maybe! The secret here is to have in mind that gaps are a powerful thing in forex and they are loved and used by a lot of traders. In relation to how many pips should your stop loss be it's difficult to answer as everybody has a different style of trading. I personally look at price action and decide my stop loss in base of it and in base where I start my trading (usually trying to buy on pullbacks and sell on spikes) I wouldn't be too worry to trading style as this definitively will come after hours and hours of trading and a good use of money management :)
Click to expand...

Nice post. If you use a stop of 2 X the gap (at 10pm UK time Sunday night) you will find you have a very profitable strategy with the strike rate more than compensating you for the R.
 
trader_dante said:
Nice post. If you use a stop of 2 X the gap (at 10pm UK time Sunday night) you will find you have a very profitable strategy with the strike rate more than compensating you for the R.
Click to expand...

Thanks for the tip, does that go for all Forex pairs ? Have you ever tried it on indices ?
 
Good post, have been looking in to this but never really bothered that much
 
spreader_legger said:
Unless you started in August :p
Click to expand...

I love gap trading, but i have to agree with spreader_legger if you started it recently you would have got burnt, alot of the old methods are not working at the moment that i know about but perhaps things will change again such is the dynamic of the market place
 
I decided to reality check some of the comments on this thread with FACTS. Last 7 weeks since start of August the EURUSD if you set stop to 2 x Gap. There were 4 wins, 2 losses and 1 no trade as the gap was 1 pip on my feed. As the winners are 0.5R the return has been zero. So people have hardly taken a beating if they were trading EURUSD.

So for the most liquid FX pair in the last 7 weeks it was break even.

I am sure some clever bar steward like megamuel/robster can backtest this fcker to give a meaningful result.

little weekend project for ya.
 
sh5467 said:
I decided to reality check some of the comments on this thread with FACTS. Last 7 weeks since start of August the EURUSD if you set stop to 2 x Gap. There were 4 wins, 2 losses and 1 no trade as the gap was 1 pip on my feed. As the winners are 0.5R the return has been zero. So people have hardly taken a beating if they were trading EURUSD.

So for the most liquid FX pair in the last 7 weeks it was break even.

I am sure some clever bar steward like megamuel/robster can backtest this fcker to give a meaningful result.

little weekend project for ya.
Click to expand...

out of interest what would it have been with no stops I did some research on the S&P and DOW some years ago and found it was tradable but with deep pockets
 
sh5467 said:
I decided to reality check some of the comments on this thread with FACTS. Last 7 weeks since start of August the EURUSD if you set stop to 2 x Gap. There were 4 wins, 2 losses and 1 no trade as the gap was 1 pip on my feed. As the winners are 0.5R the return has been zero. So people have hardly taken a beating if they were trading EURUSD.

So for the most liquid FX pair in the last 7 weeks it was break even.

I am sure some clever bar steward like megamuel/robster can backtest this fcker to give a meaningful result.

little weekend project for ya.
Click to expand...

We have already said it has not worked over the last few weeks and you would be lucky to be out with breakeven, deep pockets required

but there were ways to to make money in the pre market before 11pm if your were wise enough before the the major shifts in the market lately something i have put alot of time and effort into
 
pocrel said:
We have already said it has not worked over the last few weeks and you would be lucky to be out with breakeven, deep pockets required

but there were ways to to make money in the pre market before 11pm if your were wise enough before the the major shifts in the market lately something i have put alot of time and effort into
Click to expand...

It has had like a 88% success rate over the past few years with a 0.5R.
 
brettus said:
It has had like a 88% success rate over the past few years with a 0.5R.
Click to expand...

Which is ok, and I'll grant you it's easy to do (after all Dante can manage it :LOL:)

What I don't like is that you get say, 3 trades a month? Max you can risk on those stats is 20%, so 60% a month, pft, why stay up late on a Sunday night for that?
 
I love the way people put in a simple backtest to see what's working, if you could really be bothered you would put the time in yourself to find out whats really is working living and breathing the market is what really works, your either ahead of the game or behind it, this is not directed at you brettus
 
pocrel said:
I love the way people put in a simple backtest to see what's working, if you could really be bothered you would put the time in yourself to find out whats really is working living and breathing the market is what really works, your either ahead of the game or behind it, this is not directed at you brettus
Click to expand...

bwah ha ha ha. you said people would have got 'burned' since August, the facts say you would have broken even. No luck as you said. pure facts.

Brettus says 88% hit rate @ 0.5R in his backtest - sounds alright, I wouldnt trade it personally, not my bag, for lulz reasons. At least it some sort of edge.;)

HTML: 
but there were ways to to make money in the pre market before 11pm if your were wise enough before the the major shifts in the market lately something i have put alot of time and effort into

good for you but why have you been putting work into this? surely your pin bar edge that you are charging people to learn is a great edge right?:eek:
 
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