What Is Gap Trading?
Gaps in the Forex market help traders identify price movement clues, entry and exit signals, and trend reversals. In simple terms, gap trading is a disciplined approach to buy and sell assets. You can benefit from volatile markets in asset prices or gaps and turn these gaps into trading opportunities. Let's take a deep dive into what gaps are and how you can make the most of gap trading:
What is gap and gap trading?
A gap refers to the difference between the currency pair opening price and the previous day’s closing price. Any sharp upward or downward movement in the currency pair price can be termed as a gap. In gap trading, the traders find currency pairs that open at a higher price or an extremely low price than its previous day’s closing price, monitor its movement, and make a trade. Gaps can be identified as candlesticks on the Forex chart pattern, and sharp price movements are notably visible with low liquidity in the trading volume. Here’s how you can identify gaps:
- Look for strong support and resistance levels in the market
- If there is a strong resistance level and the currency pair price moves beyond that level before coming back to its original position, it signals to sell the currency pair
- If there is a strong support level, and the currency pair price moves below this level before coming back to its original position, it signals to buy the currency pair and limit losses
Four main types of gaps you need to know
1. Breakaway gaps
Breakaway gaps identify the strongest support and resistance price levels. They generally mark a trend reversal while moving out of a current trend.
2. Common gaps
Common gaps refer to a non-linear drop or jump from one currency pair price to another. As the name suggests, these gaps are the most common gaps to witness.
3. Exhaustion gaps
Exhaustion gaps occur when a steep decline in a currency pair’s price happens after a rapid increase. This gap signals traders that there is now a fall in the demand for the currency pair.
4. Runaway gaps
Runaway gaps in the Forex market occur in the middle of an existing trend. It occurs in the trend’s direction and is a gap that exceeds 5% of the currency pair’s price.
Top four gap trading strategies for Forex traders
1. Full gap trading strategy
The full gapping trading strategy occurs whenever a currency pair opens at a price that is above and beyond the previous day’s closing price. Full gaps indicate a strong market sentiment shift and send entry and exit signals to the traders.
- Whenever prices open beyond the previous day’s high price, it sends a long position or buy signal
- When prices drop below the opening price in the first trading hour, it sends traders a sell or short position signal
- Any sharp decline in the prices when compared to the previous day’s closing price and a day before’s low price, signals traders to place a long position order
- When a currency pair opens below the previous day’s lowest price, it sends a signal to the traders to short the trade immediately
2. Partial gap trading strategy
The partial gapping trading strategy occurs whenever the currency pair’s opening price moves beyond or below the last day’s closing price. But the opening price remains within the last day’s pricing range. The partial gap trading strategy allows traders to place trailing stop orders of around 6%.
- Whenever the currency pair opens beyond the previous day’s closing price, but below the previous day’s high price, it sends traders a signal to buy more of the currency pair
- Whenever the price for the current day is lower than the previous day’s closing price, it sends traders a buy signal
- Whenever the currency pair opens at a price less than the previous day’s closing price, it signals traders to short the trade
3. End of day gap trading strategy
The end of day gap trading strategy involves the traders scanning and reviewing the currency pairs at the end of the trading day to analyse which ones have the best potential. Since the Forex market functions 24 hours a day, from Sunday to Friday, the end of the day for Forex traders is 5:00 P.M. EST on Fridays. The volatility during this hour sends a strong indication to traders about the continued movement in the market along the gap’s direction.
- Whenever the currency pair price witnesses a gap that goes beyond the resistance level, it sends the traders an entry signal for the upcoming next week
- Whenever the prices witness a gap that moves below the support level, it sends the traders an exit signal in the market for the upcoming new trading week
4. Modified gap trading strategy
In a modified gap trading strategy, a trader places positions in the middle of a market trend. The only requirement to trade the modified gap trading strategy is that the currency pair must be trading twice (at least) the average trading volume since the last five trading days.
- Whenever a currency pair opens at the previous day’s highest price, it sends the traders a buy signal. The price for the long or sell order should be equal to the average of the high price and opening price for the current day’s first trading hour
- Whenever the price opens at less than the previous day’s lowest price, it sends a sell signal. The price for the long or sell order should be equal to the average of the low price and opening price for the current day’s first trading hour
Gap trading strategies to use in your trades
Trading the currency pair price’s gap enables you to identify potentially profitable positions. Blueberry Markets is a trading platform that delivers all the charts and informational material about different Forex trading strategies that you can apply to maximise your profits and minimise your losses. Sign up for a live trading account or try a risk-free demo account.
How to Calculate Forex Position Sizing
Each trader in the forex market defines their position size before moving forward with a trade.
Understanding Forex Risk Management
The forex market is the most liquid and largest market in the world. However, like any other financial market, the forex market can also be risky during times of high volatility.
Hedging in Forex: How to Hedge Currency Risk
Forex hedging or currency hedging allows you to open multiple trade positions to offset any possible currency risk associated with your current position
What Is PIP in forex trading?
PIPs are essential in forex as they tell the traders about the size of profits or losses that can be made from a particular currency pair.
Top Swing Trading Indicators
Swing trading is all about profiting from market swings. It is a popular speculative strategy where traders tend to buy and hold their assets hoping to profit from expected market movement.
What are Support and Resistance Levels
Support and resistance levels in the Forex market allow traders to understand the market direction and predict future prices to consider in making trade decisions.
MT4 vs MT5: Which is Better?
MetaTrader is one of the most popular online trading platforms used globally and its two main versions are MetaTrader 4 and MetaTrader 5. But between MT4 and MT5, which is one best for you?
What is Forex?
The Forex market offers high liquidity and margin opportunities for you to trade and potentially profit off of exchange rates of currencies. With a daily volume of more than $6.6 trillion in 2019, it is the largest financial market in the world.
What is Margin trading?
Margin trading is one of the most common derivative strategies used in financial markets. It can also be considered tax-efficient as it allows you to choose the size of your wager and exempts profits earned from stamp duties and taxes.
What is Leverage in Forex
Leverage allows traders to hold large positions in the Forex market with fewer capital. With leverage trading, traders can borrow money from a broker and hold larger positions, which in turn could magnify returns or losses.
How To Set a Stop Loss Order in Forex Trading
A stop loss order is used to prevent extensive losses, especially during severe market dip situations. By placing a stop loss order, you can automatically close your position if the market moves against you.
MetaTrader 5: The Complete Guide
MetaTrader 5, the powerful automated trading platform, offers advanced tools for successful trading analysis and trades in the financial markets. Aside from Forex, the MT5 platform helps you trade Stocks, CFDs, and Futures.
What is MetaTrader 4: The Complete Guide to MT4
An advanced trading platform, MT4 has become a norm for seasoned Forex traders as it helps them execute their trades even when their machine is off. It comes with a user-friendly interface, numerous technical analysis tools for forecasting market patterns, real-time currency price data, and much more.
What are Long and Short Positions in Forex?
In Forex trading, you can take long or short positions based on expectations of the market rising or falling. Long or buy positions are maintained when traders expect currency pair prices to increase in the future.
What is a Spread in Forex?
A spread is a cost built into the buying and the selling price of all the currency pairs. In most cases, Forex spreads depend on your Forex broker.
What is a Currency Pair in Forex?
The foreign exchange (Forex) market is the largest financial market in the world. With a daily average volume of about $6.6 trillion and worth over $2.4 quadrillion as of 2021, Forex is a decentralised global market for trading currencies.
How do you trade forex?
Many people want to get into Forex trading and make quick profits, but only a few even know how to start. While trading Forex online has now become easier than ever because of powerful platforms like Blueberry Markets, it can still feel incredibly overwhelming to get started with it.
When Can You Trade Forex?
In case you are wondering is Forex trading profitable, the short answer is yes. But many opt for Forex traders to make fast profits since Forex markets are operational 24 hours for five days a week.
Who trades forex?
Major players in the Forex market are financial institutions including commercial banks, central banks, money managers along with hedge funds. Many global corporations also trade in Forex to hedge currency risk.
Why trade forex?
As the largest financial market globally, Forex trading is one of the most popular investment avenues for many. The liquidity and huge trading volume make Forex trading an option worth exploring.
Forex Margin & Leverage
Forex trading usually provides much higher leverage compared to other financial instruments like stocks. This is one of the primary reasons why so many people are attracted to Forex, and more and more people have started to enter the Forex trading market.
Key steps to making your first trade in Forex
Making your first trade in Forex successfully requires in-depth knowledge about trading basics and Forex trading strategies. The learning curve to trading currencies can seem overwhelming and complex, but when you have the right information by your side, it can make the entire process all the more easier.
How is Forex regulated?
There are several Forex brokers in the Forex market, and amidst those thousands of Forex brokers, it can become nothing less than challenging for traders to find the best brokers.
When you hold a currency spot position overnight, the interest you either earn or pay is the rollover amount. Each currency has a different overnight interbank interest rate, and because you trade Forex in pairs, you also deal with two different interest rates.
Tips for Forex trading beginners
In terms of trading volume, the Forex market is the largest financial market in the world. It is also the only financial market that operates round the clock every day.
Have a basic understanding of
Forex? Ready to level up? Move on
to the intermediate course.
Guide to Forex
Enter your details to get a copy of our
Start a risk free
News & Analysis
Catch up on what you might
have missed in the market.