Simple Gap Trading Strategy for the Forex Market

The gaps that appear on a chart are pretty important. It is a price pattern which can offer information regarding the direction of the price and the strength of the market. On Forex, because of the high liquidity, gaps are not that frequent, but they do appear especially after the weekends.

In trading a myth, that the gaps are always covered, was born. The gaps are usually covered, but it can be done very fast or it can take a longer time until it will be covered.

It is important to know that there are mainly four types of gaps:

-          Common gaps, which usually appear inside a price pattern and they are easily covered (Head and Shoulders, Rectangle, Triangle, etc.).

-          Breakaway gaps, these gaps appear when the price breaks from a price pattern or above/under important levels and shows that the market is ready to continue the move and they are not that easy to be covered.

-          Runaway gaps, these are continuation patterns just like Flags and Pennants and are they are very hard to cover because of the strength and determination of the market to move forward.

-          Exhaustion gaps are announcing that the market has reached a limit and the current move might be reversed soon and this is why it is easier for this gap to be covered.

The strategy we recommend when trading gaps it is pretty easy. When a gap appears a trader should look for other technical elements that will tell him what kind of gap it is. If he managed to determine if it is a common, breakaway, runaway or exhaustion gap, then he should wait for another candle to be drawn.

An opening of a trade right at the opening of the gap it is pretty dangerous. If another candle or candles are drawn he can use the new low as a support level. A break through this level can be used as a trigger for the trade.  The Stop level can be set above a high; it can also be the closest one. As take profit the trader can set several levels. One can be the 50% of the gap and the second the high of the last candle before the gap.

See our example on the next chart:


Chart: EURUSD, M5

This system can be adapted for all Forex instruments and time frame. The trader should consider other elements like support/resistance for his stop loss and take profit levels. The gaps could be fully closed or just partial and that is why it would be better to take into consideration several TP levels. Do not forget to apply to this strategy also your money management.

What to Expect from the Forex Market Next Week 16 – 20 September

Another week has past and some very interesting readings were published. Wednesday Great Britain has published some very good data from the labor market. Its Claimant Count Change has fallen 32.6K and the Unemployment Rate dropped unexpectedly at 7.7%. The next day Australia reported a rise in its Unemployment Rate of 0.1% and RBNZ’s governor said that it expected a rise in the inflation rate in 2014 and they might have to raise the interest rate. Thursday it was also published the Unemployment Claims for USA at a value of 292K, but it might have been a problem with their computerized systems and this number could be revised next week.

The economic calendar for next week looks like this:

Date Currency Forecast Previous
MonSep 16 NZD Westpac Consumer Sentiment 116.6
GBP Rightmove HPI m/m -1.80%
JPY Bank Holiday
EUR Italian Trade Balance 4.13B 3.62B
EUR CPI y/y 1.30% 1.30%
EUR Core CPI y/y 1.10% 1.10%
CAD Foreign Securities Purchases -2.23B -15.41B
USD Empire State Manufacturing Index 9.2 8.2
USD Capacity Utilization Rate 77.80% 77.60%
USD Industrial Production m/m 0.50% 0.00%
TueSep 17 GBP BOE Quarterly Bulletin
AUD Monetary Policy Meeting Minutes
AUD New Motor Vehicle Sales m/m -3.50%
CNY CB Leading Index m/m 1.40%
CNY Foreign Direct Investment ytd/y 7.10%
NZD REINZ HPI m/m -0.50%
EUR Current Account 18.3B 16.9B
GBP CPI y/y 2.70% 2.80%
GBP PPI Input m/m 0.30% 1.10%
GBP RPI y/y 3.20% 3.10%
GBP Core CPI y/y 2.10% 2.00%
GBP HPI y/y 3.40% 3.10%
GBP PPI Output m/m 0.20% 0.20%
EUR German ZEW Economic Sentiment 45.3 42
EUR ZEW Economic Sentiment 47.2 44
EUR Trade Balance 15.3B 14.9B
USD Treasury Sec Lew Speaks
CAD Manufacturing Sales m/m 0.60% -0.50%
USD Core CPI m/m 0.10% 0.20%
USD CPI m/m 0.20% 0.20%
USD TIC Long-Term Purchases -45.3B -66.9B
USD NAHB Housing Market Index 59 59
WedSep 18 NZD Current Account -1.87B -0.66B
AUD CB Leading Index m/m -0.20%
AUD MI Leading Index m/m 0.00%
AUD RBA Assist Gov Edey Speaks
GBP MPC Asset Purchase Facility Votes 0-0-9 0-0-9
GBP MPC Official Bank Rate Votes 0-0-9 0-0-9
CHF ZEW Economic Expectations 7.2
USD Building Permits 0.95M 0.95M
USD Housing Starts 0.93M 0.90M
USD Crude Oil Inventories -0.2M
CAD BOC Gov Poloz Speaks
USD FOMC Economic Projections
USD FOMC Statement
USD Federal Funds Rate <0.25% <0.25%
USD FOMC Press Conference
ThuSep 19 NZD GDP q/q 0.20% 0.30%
JPY Trade Balance -0.81T -0.94T
CNY Bank Holiday
AUD RBA Bulletin
JPY BOJ Gov Kuroda Speaks
JPY All Industries Activity m/m 0.30% -0.60%
CHF SECO Economic Forecasts
CHF Trade Balance 2.74B 2.49B
CHF Libor Rate <0.25% <0.25%
CHF SNB Monetary Policy Assessment
GBP Retail Sales m/m 0.50% 1.10%
GBP CBI Industrial Order Expectations 2 0
CAD Wholesale Sales m/m 1.60% -2.80%
USD Unemployment Claims 323K 292K
USD Current Account -96B -106B
USD Existing Home Sales 5.27M 5.39M
USD Philly Fed Manufacturing Index 10.5 9.3
USD CB Leading Index m/m 0.60% 0.60%
USD Natural Gas Storage 65B
FriSep 20 NZD Visitor Arrivals m/m 1.30%
CNY Bank Holiday
NZD Credit Card Spending y/y 4.70%
JPY BOJ Gov Kuroda Speaks
GBP Public Sector Net Borrowing 11.9B -1.6B
CAD Core CPI m/m 0.10% 0.00%
CAD CPI m/m 0.10% 0.10%
EUR Consumer Confidence -14 -16
USD FOMC Member George Speaks
USD FOMC Member Tarullo Speaks
USD FOMC Member Bullard Speaks

As you can see in the table, Tuesday there will be posted the CPI for Great Britain, the German ZEW Economic Sentiment and the Core CPI for the United States. Wednesday the event of the day and maybe the most important of the week is the FOMC Press Conference. The markets are waiting for details regarding the Quantitative Easing program. Thursday Great Britain will publish its Retail Sales and from USA there will be the Unemployment Claims, Existing Home Sales and Philly Fed Manufacturing index. On Friday Kuroda will have a speech and Canada will report its CPI.

Forex Trading for Beginners: Basic Questions and Myths

What is Forex?

This is the most common question in a beginners mind: The name Forex comes from foreign exchange and it is specific to currencies market. After the accord from Breton Woods, that took place in 1971, the currencies were allowed to change freely against one another so their value started to vary.

The commercial and investment banks took the opportunity and offered the process of exchange to their clients creating this way a speculative environment for trading on currency against another. The foreign exchange market started to be better known with the help of the internet and the online brokers.

The stock exchange is a regulated market in which you know the traded volume, the traders and why the stock is traded. Forex is an OTC (Over the Counter) market because, simply said, it incorporates every currency exchange done anywhere at any time, so it is pretty hard to regulate something that doesn’t have a headquarters and the trades cannot be registered.


Practically if you want to change dollars for euros you go to the bank and change them, but you can also get some euros for your dollars from a European friend. Both ways you take part in the Forex market, but it doesn’t mean that you can move the Euro – Dollar pair exchanging 100$, 1.000$ or even 1.000.000$. Forex has the biggest amount of money involved every day. As you can see in the chart, an estimate daily volume is about 3.98 trillion dollars, more than on any other regulated exchange.

The biggest players in the Forex market are usually the Commercial Banks followed by investment funds, hedge funds, corporations and brokerage houses. The highest liquidity it is found at the biggest players so if an exchange is needed it can be done with banks with a huge spread (bid/ask difference) if the sum of money is small and with a very small spread if the sum of money is considerable.

Is the Foreign Exchange Market a Necessity ?

Let’s look at this scenario:an US investor would like to invest in another country he would have to use that countries money so he would have to change the US dollars in the other currency. If a company would like to make a purchase of another company from another country it will have to change between currencies and the examples can go on.

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