Forex trading is a complex and dynamic market, and one of the most popular strategies is trading gaps. Gaps occur when the price of a currency pair opens significantly higher or lower than the previous day’s closing price. This can happen due to various reasons such as news announcements, economic data releases or geopolitical events. Trading gaps in forex can be a lucrative opportunity for traders, but it requires a thorough understanding of the market and the right strategy. In this article, we will explain how to trade gaps in forex PDF.
Understanding Gaps in Forex
Gaps in forex occur when the market opens at a price significantly higher or lower than the previous day’s closing price. These gaps can be seen on the price chart as a space between the previous day’s closing price and the opening price of the current day. The size of the gap depends on the magnitude of the news or event that caused the market to move.
Types of Gaps
Gaps can be classified into three types:
1. Common Gap: Common gaps occur frequently and are usually not significant. They occur due to normal market fluctuations and can be filled quickly.
2. Breakaway Gap: Breakaway gaps occur when the price breaks through a significant level of support or resistance. These gaps are usually large and signify a change in trend.
3. Runaway Gap: Runaway gaps occur when the market is already in a trend, and the gap confirms the continuation of the trend. These gaps are also significant and can lead to extended trends.
Trading Gaps in Forex
Trading gaps in forex is a popular strategy among traders. There are two main ways to trade gaps:
1. Gap Fading: Gap fading is a strategy where traders take a contrarian approach and trade against the direction of the gap. This is done on the assumption that the gap will be filled, and the price will return to its previous level. This strategy is also known as “closing the gap.” Traders can enter a short position if the market opens higher or a long position if the market opens lower.
2. Gap Trading: Gap trading is a strategy where traders go with the direction of the gap. This is done on the assumption that the gap will continue and lead to a significant trend. Traders can enter a long position if the market opens higher or a short position if the market opens lower.
Gap Fading Strategy
The gap fading strategy is a popular approach for traders who believe that the gap will be filled. Traders can use the following steps to implement this strategy:
Step 1: Identify the Gap
The first step is to identify the gap. Traders can use a price chart to identify the size and direction of the gap.
Step 2: Wait for Confirmation
Traders should wait for confirmation that the gap will be filled. This can be done by monitoring the price action and looking for signs of a reversal.
Step 3: Enter a Position
Once traders have confirmed that the gap will be filled, they can enter a position. Traders can enter a short position if the market opens higher or a long position if the market opens lower.
Step 4: Set Stop Loss and Take Profit Levels
Traders should set stop loss and take profit levels to manage their risk. Stop loss levels should be set above the high of the gap, and take profit levels should be set at the previous day’s closing price.
Gap Trading Strategy
The gap trading strategy is a popular approach for traders who believe that the gap will continue and lead to a significant trend. Traders can use the following steps to implement this strategy:
Step 1: Identify the Gap
The first step is to identify the gap. Traders can use a price chart to identify the size and direction of the gap.
Step 2: Wait for Confirmation
Traders should wait for confirmation that the gap will continue and lead to a significant trend. This can be done by monitoring the price action and looking for signs of a continuation.
Step 3: Enter a Position
Once traders have confirmed that the gap will continue, they can enter a position. Traders can enter a long position if the market opens higher or a short position if the market opens lower.
Step 4: Set Stop Loss and Take Profit Levels
Traders should set stop loss and take profit levels to manage their risk. Stop loss levels should be set below the low of the gap, and take profit levels should be set at a significant level of support or resistance.
Conclusion
Trading gaps in forex can be a lucrative opportunity for traders. However, it requires a thorough understanding of the market and the right strategy. Traders can use the gap fading strategy to trade against the direction of the gap or the gap trading strategy to trade with the direction of the gap. Both strategies require traders to wait for confirmation and set stop loss and take profit levels to manage their risk. By following these steps, traders can successfully trade gaps in forex PDF.
