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How to Trade Gaps in Forex Market
Written by: PaxForex analytics dept - Tuesday, 25 July 2017 0 comments
Although there are markets that close every day and therefore have real gaps, forex doesn’t do this. The only time it closes is on Friday and it reopens on Sunday. So the only real gaps which exist in forex are these weekly gaps and that is only if the price changes significantly. Gaps are most common in stock trading because, unlike the forex market, stock markets close each day and any events which occur during the time of closure may result in the price opening higher or lower compared to the most recent close.
The forex market operates 24 hours per day and technically closes during the weekends on Saturdays and Sundays. However, the forex market is only closed to retail traders. The large banks and hedge funds may still trade during the weekend and this trading creates gaps. Gaps tend to develop based on fundamental news during the period when the markets are closed to retail traders but may also be based on technical factors such as breakouts. Therefore, although there are usually no gaps in the forex market during the weekdays, gaps are common during the weekends.
Trading the gaps is a matter of choice. While some traders swear by trading gaps, other traders avoid doing so. Some traders have found that, depending on the particular currency pair, the gap tends to be filled in the majority of cases. These traders therefore feel comfortable trading
the gap. On the other hand, other traders are of the view that the gaps don’t always get filled and that they tend to be filled less often than not. These traders avoid trading the gaps. The truth is that trading the gaps may be profitable if you choose the right currency pairs or stock indices and if those markets tend to fill the gaps more often than not.
Because the forex market is decentralized, and thus operates around the clock, it rarely forms gaps during the working week. Instead, you can observe gaps between the closing exchange rate on Friday and the opening value on Sunday. You can rarely see a currency cross gapping during the week, at most for a couple of pips. Here gaps appear in intraday trading on a chart as large candles and form when an economic report causes a sharp move up or down, which is not accompanied by enough liquidity.
Just like any other type of trade in forex, it can be profitable and it can lose money. If there was one method of trading that was always profitable then every trader would be rich. Unfortunately, the market is always changing and is completely unpredictable. The best you can do is try your hand at trading gaps and see how it works out for you. Trade gaps aren’t always profitable but they shouldn’t intimidate you from making a trade on what looks to be a good trade. The gap can fill quickly or it can take a great deal of time to fill.