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#1 22-08-2021 21:44:57

johnedward
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From: Paris - France
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Trading gaps on Sundays upon market opening

Trading gaps on Sundays upon market opening


Trading Forex Gaps on Sundays when the market opens
Weekend trading in the forex market sees conventional working hours expand to Saturday and Sunday. This article will explain how to use the weekend gap trading strategy. We'll also walk you through everything you need to trade the forex market over the weekend, including brokers and the main trading hours.

Weekend Forex Trading Hours

The forex market traditionally operates 24 hours a day, 5 days a week, closing at 17:00 New York time on Friday and reopening at 19:00 on Sunday. This is because institutional forex traders and banks operate mainly Monday through Friday and take time to rest on weekends.

However, the forex market is decentralised and technically trading hours are open 24/7. And even though the trading volume is lower on weekends, the market still presents opportunities. In particular, a growing number of retail investors are trading the weekend gap.

Gap trading strategy

The weekend forex trading strategy - which capitalises on gaps - consists in anticipating that the Sunday open price will revert to the Friday close price. The "gap" is simply the price difference between the traditional forex market closing price on Friday night and the reopening price on Sunday. Important news, for example, could trigger a gap.

Spreads require significant volume, however, and as the major players are out of the game during the weekend, it's the closing spreads that we're interested in. Closing gaps can be triggered by a small number of traders investing in the same direction. The market is reacting sharply, and many traders remain puzzled. So they trade against the trend, hoping to profit from the mistake.

Types of Forex Gaps

There are three types of forex gaps that are important for this trading strategy:

Arrow Breakout Gaps - These occur when the price diverges from a pattern or exceeds critical support or ceiling levels. Price usually moves with a lot of momentum, often outside of the consolidation phase, leaving a gap.

Arrow Continuation Gaps - These occur during a price pattern and suggest a wave of buying and selling, with traders all convinced of the direction of the market.

Arrow Exhaustion gaps - These occur near the end of a price pattern and signal an attempt to reach new highs or new lows. Exhaustion gaps typically follow a sudden rise and present an abnormal increase in volume that suddenly turns around. Essentially, no one else enters the trade, and the price drops sharply, signaling the end of the trend.

Gap trading strategy in action

Choose a currency pair

Open your forex trading platform and choose a widely traded currency pair. EUR/USD is the most liquid, accounting for 29% of the global currency trading volume, and it is the least volatile, making it ideal for a weekend gap strategy. Other good options are the USD/JPY and GBP/USD pairs.

Setup

Now watch the closing price at 17:00 (New York time) on Friday. Say, for example, it was 83.00. We can use this to determine if the spread can be traded when the market opens on Sunday.

Gap size

Next, think about how big the gap needs to be for you to take a position. A 1% spread means the price opens at around 83.80 (83 x 0.01 = 0.80) or 82.20. Change the size of the percentage according to your liking for risk.

Open a position

When the Tokyo market opens at 19:00 (NY time) on Sunday, take a position if the open is at least 83.80 or 82.20. Your profit target is the Friday closing price of 83.00. So, if the market opens at 83.80, you can sell the pair and exit the trade when the price hits 83.00.

Alternatively, if the market opens at 82.20, you can buy the pair and exit the trade when the price returns to 83.00. You want to keep the trade open until the gap is closed or your chart suggests that the gap will continue to widen.

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