Introduction
Gap and Leave is an interesting trading strategy that utilizes one of the most distressing phenomena of the forex market, a weekly gap between the last Friday’s close and the current Monday’s open price. The gap takes its origin in the fact that the interbank currency market continues to react on the fundamental news during the weekend, which results in a kind of opening on Monday at the highest level of liquidity. Today’s strategy is based on the assumption that the gap is a result of speculations and excess liquidity. Therefore, a position in the opposite direction should become profitable after a few hours.
In the past few articles, we discussed strategies that were pertaining to ‘trend pullback.’ Now, we will shift our focus and talk about a strategy that is best suited for trading a ‘range.’
Time Frame
This strategy works well on the 15-minutes and 1-hour time frame. Traders looking to trade intraday should use the strategy on the 15-minutes time frame. While traders looking for swing trading opportunities should look at 1-hour charts.
Indicators
No indicators are being used in this strategy. It mostly relies on price action and market speculation.
Currency Pairs
This strategy is suitable for trading in currency pairs, which are volatile and liquid. Also, since the Asian market is the first one to open for trading after the weekend, we would suggest applying this strategy in currency pairs involving the Japanese yen, Australian dollar, and the New Zealand dollar.
Strategy Concept
Gap and Leave is an easy strategy that is based on simple price action and speculation. It is observed that events and occasions that occur during the weekend give rise to unfilled orders in the market, which leads to a gap on Monday. This gap is a result of speculation and sudden infusion of liquidity in the market, as an outcome of the event. Most of these events are not of great importance, which means they do not have long-lasting on the value of a currency.
This characteristic can be used to our advantage by entering at discounted prices. Here it is important to note that the gap should coincide with a technical level of support and resistance. As mentioned earlier, this is a ‘range’ trading strategy. The price must reach the extremes of the ‘range’ as a result of the ‘gap.’ The idea is to go ‘long’ at support and ‘short’ at resistance. But this is done by following all the rules of the strategy.
The strategy offers a high risk-to-reward since we are executing our trades at the lowest prices, keeping a target at the other end of the ‘range.’
Trade Setup
In order to explain the strategy, we shall consider an example where we will execute a ‘long’ trade-in GBP/NZD pair on the 15-minutes time frame. Here are the steps to execute the strategy.
Step 1
Firstly, we should identify a ‘range’ that is newly formed. By this, we mean, the price should have reacted from the top or bottom of the range at least twice and moved to the other end. At the same time, we need to also ensure that the ‘range’ is not very old. We should not be considering ‘ranges’ where the support and resistance levels have been respected more than 5-6 times.
In our example, we have identified a ‘range’ on the 15-minutes time frame where the price has reacted twice from the resistance and four times from the support.
Step 2
The next step is to watch for Friday’s closing price. The candle must close somewhere in the middle of the range. This is because if the market has to gap on Monday, the gap will take the price at one of the extremes of the range. If the candle closes at support or resistance on Friday, the price gap will lead to a breakout or breakdown that will violate the ‘range’ trade. Then we should look for a breakout strategy.
In the case of GBP/NZD, we can see that the price almost closes in the middle of the range.
Step 3
This is the most important step in the strategy. In this step, we watch the market’s behavior on Monday and see if it opens with a gap or not. If the market gaps down to the support of the range, we will look for taking a ‘long’ trade after a suitable confirmation. On the other hand, if the market gaps up to the resistance, we will take a ‘short’ trade provided we have followed all the steps discussed earlier. A bullish candle after ‘gap down’ is the confirmation for a ‘long’ trade, and a bearish candle after ‘gap up’ is the confirmation for a ‘short’ trade.
In the below image, we can see that the price forms a bullish candle after gapping down on Monday. Hence, we enter for a ‘buy’ at this close of the first candle.
Step 4
Lastly, we need to determine the stop-loss and ‘take-profit’ for the strategy. Stop-loss placement is pretty simple, where it is placed below the support when ‘long’ in the market and above the resistance when ‘short.’ We take our profits when the price reaches the other end of the range. This means at resistance when ‘long’ and at the support when ‘short.’ The risk-to-reward of trades using this strategy is above average, which is quite attractive.
Strategy Roundup
Gaps are one of the most common tools used by institutional traders due to the high probability of winning trades. This strategy is based on market movement that is only a consequence of speculation, which does not hold any value. If we are looking for a gap trading strategy in forex, the Gap and Leave strategy is a good one to start with because it is great for beginners who want a relatively easy entry, at a slow pace and not involving complex indicators.