One of the most popular strategies used by both long-term traders and day traders is the Forex Gap Strategy. This is a very simple to follow strategy that enables you to capitalise on a trending market. Its simplicity is what makes this strategy so effective. There are no difficult or complicated calculations to make, just a quick glance at a daily price will tell you all you need to know!
What Exactly is a Gap Strategy?
The gap strategy is one of the oldest Forex trading strategies around. Traders have been using it in both the stock markets and the forex markets since those markets first started trading many years ago, so it is certainly tried and trusted.
Let’s start by looking at what exactly constitutes a gap. If the market closed the previous day at a high, then opened today even higher, then the distance between the two prices is the gap, and signifies an upward trend (i.e. a buying opportunity). If the market closed the previous day at a low, then opened today even lower, then again there is a gap but this time signifying a downward trend (i.e. a selling opportunity). Sounds simple? Well, it is but with one or two caveats.
The Problem with Forex Gap Trading Strategies
The main problem with trying to trade gap strategies on the Forex market is that it is generally considered to be a 24-hour market. Unlike trading stocks, futures or options on a recognized exchange, Forex is traded “over the counter”, around the world, on a 24-hour basis. So with constant trading, there are no gaps.
The way to get around this is to create artificial “trading days” based upon your own time zone and/or the currency you are trading. So say for example you are based in the US and are trading US Dollar versus Japanes Yen, you could define your trading day as being from 7am EST to 6pm EST. There is no reason why adopting this approach will not work.
Profit Targets and Stop Losses
Generally speaking, you want to run the position as long as the trend continues. But you also want to make sure that you have stop loss orders placed strategically to close the position if it goes against you. If you have bought a “gap up”, then start by placing a stop loss order to close the position if the price goes a pre-defined amount below your buying price (how far below depends upon how much risk you want to take with your position. Then if the price continues to trend upwards, you can move this stop order up at strategic intervals. Reverse the position if at any point the price gaps down.
That’s pretty much all there is to it. You can make a tidy profit by following a Forex Gap Strategy, but as with all Forex trading, never risk more than you can afford to lose!