“Sunday Gap: trading
with the gap” is an pratical article with examples that shows
how trading with the gap. The Forex market is closed from Friday
evening until Sunday evening (assuming GMT time to make it easier for
everyone).
Quite often the price
that currency pairs open at on Sunday is different from what they
closed at on Friday – this different is called the ‘Gap’.Now,
price almost always “closes” the gap, that is, price trades up
(or down) towhere price was on Friday within 24 hours (but
occasionally a lot longer).
Sometimes the gap can be
20 pips… and sometimes it can be 200! Take a look at the following
– a 30-minute chart of the USD/JPY pair:
So by selling on Sunday
as the market opened there was 20 pips available…which was
fulfilled over the next 4 hours.This is a valid strategy – just
look for gaps… however there becomes a fairlysignificant issue and
that is: What if the market goes the other way? Remember, the market
does not have to close the gap, it can take asloooooooong as it wants
– even if that means going 800 pips in the otherdirection before
closing the gap (which can happen, I saw it once on theEUR/JPY, it
eventually closed the gap four days later on a Thursday!). Take a
look at this example:
So there was a 14 pip
potential profit on this gap… but just buying on Sunday when the
marke topened would either result in a large loss as the market
wentagainst you and you’re squeezed out… or you try and stomach
the large drawdown.
Either way not a great
trade at all in the case! This is where we “tweak” this market
gap thingy…
We require knowledge of
candlesticks to help us. If you don’t know anything about them…
you’ll probably do okay as I explain it pretty well anyway!
We’re going to use our knowledge of candlesticks and how they work
to “tweak” the Sunday Gap strategy into something that we can
trade with security and confidence! What we do is actually really
simple; we look for a gap on a currency pair and then, instead of
just jumping in, we wait patiently until we get a solid candlestick
pattern. A candlestick pattern does three things for us:
#1 – Confirmation, with
the occurrence of a reliable candlestick pattern, of what we are
hoping the market is going to do.
#2 – Somewhere to place
our stoploss – we do not trade without it!
#3 – We will typically
get an even better entry price!
As always, the best way
to explain is with actual examples, so let’s get to it… First
example is on the EUR/USD 1-hour chart. We get a decent gap and then
a solid-looking Harami pattern occurs:
Now, from this first
example, what do you notice? Our entry was even lower than the
initial gap!
The initial gap was 22
pips… but our entry (after the Harami formed) would be almost 20
pips lower. The total available to us on this trade was around 40
pips – almost double that of what was available right on the open.
We also get a very small stoploss of around 18 pips by placing it
below the low of the Harami pattern.
The next trade is again
on the EUR/USD 1-hour chart. We get a 25 pips gap on Sunday… then
we wait for candlestick confirmation; we get this around 2-3 hours
later in the form of a Hammer candle AND a Bullish Engulfing
together:
The combination of the
Hammer and Bullish Engulfing pattern is very powerful. You
could however have entered right after the Hammer formed – this was
a good signal itself! The AUD/USD provides a nice opportunity on the
1-hour chart:
This is a prime example
of how an initially small gap can be played as a large one if we wait
for candlestick pattern confirmation. The main candlestick here is
the Long-legged hammer and then further confirmation of this pattern
with the Bullish candle.
In this final example we
get an absolutely clear-cut Bullish Engulfing candle on the AUD/USD
1-hour again:
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