A gap strategy that guarantees profits from price gaps
A more detailed study of the historical characteristics of trend movement reveals a host of patterns that, one way or another, help shape Forex strategies.
One of such patterns is the emergence of breaks in the trend movement.
A Forex gap is a price gap that occurs when there is a certain difference between the end of the last candle and the beginning of a new one.
Typically, gaps occur after weekends or holidays, with the trading session on Friday closing at one price and opening with some gap on Monday.
The reason for this phenomenon is a change in the exchange rate that occurred over the weekend or holidays, while trading was closed.
Knowing this fact, you can build your strategy on gaps and make a profit. It would seem that nothing could be simpler: you spot a gap and open an order with the expectation that the price will close the gap. However, in practice, several important points must be taken into account.
What is the gap trading strategy?
Trading is only worthwhile if there is a price gap, if one is found on the chart; only in this case should we proceed to opening trades.
The gap trading strategy consists of several stages:
1. Determine the size of the price gap; it should be at least 20 points, or 200 if you have a five-digit quote.
2. Determine the direction of the trade – if the gap forms lower on the chart, a sell trade is opened; if it forms higher, a buy trade is opened. The assumption is that the price will move in the direction of the gap and close it.
3. We place a pending order, the trigger point of which is the closing of the gap, as shown in the figure.
4. Calculate the take profit size – we determine the value of this order depending on the gap size. I set no more than 10-15, not much, but reliable.
5. Stop-loss order – also set within 15 points.
If you want to really increase the size of your planned profit, you can do so by not limiting this figure with a take-profit order, but by setting a trailing stop.
The second, simpler option.
It is also recommended to use a simpler option, in which case you detect a gap and immediately place orders towards closing.
That is, the price before the weekend was 1.2660, after the weekend the first quote was fixed at a price of 1.2720, which means we open a sell order and wait for the resulting gap between the quotes to close.
In the long term, it is possible to take up to 60 points of profit, which is the value of the price gap that has arisen on Forex, and one can hope that the price drop will be no less.
Also, if you spot a gap in the middle of a trading session, and the price is moving away from it, you can wait for a reversal and open a position, but this will be a riskier trade.
On average, the gap strategy, when used on Forex, allows you to gain from 10 to 50 points of profit per trade. The only drawback is that this phenomenon occurs quite rarely, but to make a profit, it is worth using other Forex patterns.
Unfortunately, there are exceptions to this rule, so if you opened a trade expecting the price to close a price gap, try not to ignore it, or at least don't forget about the stop loss.
Additional materials:
Gap Statistics Script - https://time-forex.com/skripty/statistika-gep
