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. However, currency exchange still goes on in the outside world, and if the weekend events cause a significant movement of one currency against another, this will produce a “gap” as retail brokerages update their trading platforms to reflect the new realities.
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 2011. The war broke out on a weekend, and led to immediate concerns about global crude oil prices. This led to a 400 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. Our experience has shown that in 70% of cases, the gap actually closes. 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.
