Have you ever opened your trading platform at the beginning of the week only to see that the market has moved a lot since the last trading day with no intervening candles? This is what is known as the forex weekend gap. The forex weekend gap occurs when there has been a major market moving event during the weekend when retail brokers are closed.
Certain clues can lead a trader to know when a weekend gap will occur. When there is a major political or economic event that will affect the demand on a currency or an asset, this will likely produce a weekend gap.
One such gap occurred in crude oil prices at the outbreak of the Libyan Civil War in February The war broke out on a weekend, and led to immediate concerns about global crude oil prices.
This led to a pip weekend upward gap. Another instance occurred on the weekend when France voted out the pro-austerity Sarkozy government and voted in the Francois Hollande-led government which was largely in favour of an easing of the austerity measures. The impact on the Euro was felt with a weekend gap to the downside as concerns about the exit of Greece from the Eurozone and a collapse of the European monetary union mounted. As a trader, the weekend gap can make you some good money if you know how to play it.
How do you trade a gap? It is virtually impossible to predict the direction the weekend gap will take. Obviously if you are in a currency position at the close of the market on Friday and the market gaps in your favour, you are in for some good money. But if the market gaps against you, you stand a chance of not just losing the trade, but losing more than your stop loss target as a slippage could occur, pushing you deep into red territory.
A strategy that actually works is not about trading the gap itself, but trading the gap closure. The gap closure is a phenomenon that occurs when the market realises that the reason for the gap was actually not so wonderful as to sustain the trade in the direction of the gap. As such, we will see traders unwinding gap positions and trading against the gap. So the advice on trading the gap here is to wait for the market to open, and immediately trade against the gap using sound money management.
This chart illustrates the closure of the weekend gap that occurred after EU financial ministers held a meeting and approved bailouts for Spanish banks. This caused an upside gap as this was a Euro-positive news. However, requests for bailout from several other banks and EU countries such as Cyprus led the market players to believe that we were still not out of the woods as far as the Eurozone crisis was concerned, and traders immediately began dumping the currency, leading to a closure of the gap by the time the trading day was over.
This represents a much safer way of trading the gap than leaving positions open over the weekend. I am a forex analyst, trader and writer. I have had a career writing articles for websites and journals, starting in the travel sector and then in Forex.
I use a combination of technical and fundamental analysis in my forecasting. When I joined Forex4you in I thought it was a great opportunity to work as an analyst for an international broker. I provide technical forecasts with clear entry points and targets as well as articles on fundamental and trading themes.
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