Judging by the chart patterns popularity, quite a lot of Forex traders are using price gaps in their trading. You can even learn one Forex gap strategy on our website; it is based on gaps filling (for GBP/JPY).
Now, it looks like gap trading is only rising in popularity in the Forex community. So, it is only natural to outline some other potential ways to use chart gaps in your trading system:
- Trading in the direction of the weekend gap is a popular technique in stocks. The news that appeared during the market inactivity period and made the price jump on Monday’s opening is not going to disappear, so it is logical for the asset to continue moving in line with the gap. For some reason, in Forex, this rarely works.
- Trading against the gap, expecting it to be filled, is a technique based on the assumption that most gaps are some unnatural price movements and should be compensated. This is often proved to be correct with volatile currency pairs — after all, the gaps are usually quite thin compared to the average daily trading range of such trading instruments and thus have a nice chance of getting covered.
- One gap trading method that rarely gets mentioned is to open a position on Friday, in the anticipation of a gap. It is definitely a more difficult way to deal with the price jumps because it involves a lot more guesswork, but it is potentially more rewarding as the usual after-gap action can also be used to earn profit.
- Of course, many traders prefer to close all positions before weekend and stay away from currency pairs that gapped too much on Monday. Rightfully, they believe that such a chart pattern is a definite sign of a high uncertainty level.
Additionally, we provide some MT4 tools to test weekend gap profitability.
If you were wondering what results can such gap trading methods yield, particularly the against-the-gap strategy, and which pairs are best suited for such trading. The two MetaTrader 4 expert advisors presented below were developed specifically for such testing. As is, they cannot be used for actual live trading of gaps — rather they can only be used for backtesting in Strategy Tester — but with some basic coding skills, they can be transformed into real expert advisors to trade weekly Forex gaps.
The first such tool is my_Gapper2.mq4; it is more or less a real expert advisor in terms that it at least opens and closes positions. It opens a position at the week start and closes it every Friday (at the beginning of the day) — it is a very rough gap trading simulation. You can run the EA in Strategy Tester on D1 timeframe to see the results. Other from the obvious StopLoss, TakeProfit, Lots, and Slippage parameters, it also has the MinGap input parameter, which is the minim size of gap denominated in currency pair’s spreads to consider for position opening.
my_Gapper3.mq4 is somewhat different. It doesn’t trade at all. Instead, it records the price rate differences between the week start, when the gap was detected, and the ends of all weekdays. That way, as a result, we have here potential gains for 10 different cases: close on 5 different weekdays for going in the same direction as the gap, and close on 5 different weekdays for going in the opposite direction. The totals are produced to the Journal tab of the MT4 Strategy Tester. Backtest this “EA” on a daily timeframe (or lower). Its only input parameter (MinGap) behaves similarly to that of the my_Gapper2.mq4.
You can quite easily alter these EAs to make them trade more correctly and then they could be used on live accounts to trade the Forex gap strategy. But this remains is up to you.
If you have some questions or comments about the weekend gap trading in Forex or the provided tools for gaps backtesting, you can discuss this topic in our forum.
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