Trading Gaps in the Forex: Not Trendy, But Very Profitable!

by : Jason Fielder

Common sense isn't common, more young kids know who's on the "Surreal Life" than know where Mexico is located, and if it's not new, it's not "trendy" or "hip." While this general foolishness seems to have nothing to do with Forex trading, why is it that long effective trading strategies are ignored because they're "simple" or "old?"

Why spend hours a day on an advanced, new fangled, supposedly cutting edge (read: complicated and confusing) trading system when the old "boring" version is profitable?

Isn't profit the point? Isn't it better to be old, boring, and profitable than new, flashy, and questionable? Isn't profit the bottom line here?

Gap trading is nothing new. It's been used in the stock market and in commodities trading for decades, and takes advantage of the difference, or "gap" between the closing price of the day before with the opening price of the next day, but this strategy is ignored in the Forex. Why is that?

Well, gaps rely on a market close, and when the Forex market never closes, it's really hard to get a gap or take advantage of it. In fact, during an entire trading week, there is only one time when using gap trading strategies in the Forex market is even possible! Sunday night at the open is the only time that gap trading Forex is possible.

Boring? For most of us, yeah. Pointless? Oh heck no. While different trading systems are looking for that .5% or that 1% above the 50% mark, some signs and indicators suggest that the Forex gap method is correct over 85% of the time.

No, that's not a typo, and that's not hype. Once a week may be boring, but those numbers make it worth the wait and should have you drooling at the possibilities.

So how do you trade the gaps on the Forex market?

First, understand that there are 3, and ONLY 3, things that the price can do between Friday's close and Sunday's open. They can:

1.Open above Friday's close, which is called "gapping up"
2.Open below Friday's close, which is called "gapping down"
3.Open at the exact same price, meaning there was no gap

There can be large gaps, often referred to as "full gaps" in price, or small gaps, known as "partial gaps." As far as strategy, there's no difference between the two. Good gap trading strategy works for all types of gaps. The one thing to watch out for is gap size. I don't recommend trading a gap unless there is a 15 pip difference, and this strategy is best used with the major currency pairs.

Knowing this, the rule to trading gaps may seem the opposite of what you would expect, but if you want to be right 85% of the time, here's the rule you want to follow: Whatever direction the gap is going, you want to trade the opposite direction.

So if a pair gaps up, sell short, if it gaps down, buy more. This strategy works a stunning amount of the time, and can be the edge in the Forex market that you've been looking for.