Today let’s talk about those gaps that occur between the closing price on Friday trading instrument and the opening price on Monday. But let’s start with the definition of what exactly is the gap. Gap — a price difference between the quotes in the chosen instrument trading timeframe. On many Internet — resources about forex, we can find a trading strategies based on gaps. There trade on gaps is touted as a very simple and very lucrative. Indeed, what could be easier — chose a certain number of currency pairs, pointed to a closing price on Friday and wait with bated breath gap on Monday, anticipating an easy profit.
So, try to understand, is it really trading on gaps can bring significant income with minimal risk. To do this, analyze the chart of the most popular currency pair EUR \ USD last year. We only pay attention to gaps greater than 20 points. During this time, I counted 21 gap. Now let’s see how these gaps were closed. 10 gaps were closed the same day, while in four cases, the price went first to the other side by a large magnitude gap. Another seven units were closed during the same week. 3 Gap closed later. One gap is not closed yet (from 07.05).
Now let’s analyze what we could bring trading on gaps at its simplest tactics, that is when we set take-profit at the closing of the gap and stop-loss equal to the value of TP. From previous observations it is clear that the deal would be closed for take-profit 6 times and the stop-loss 15 times. The result is a loss.
Some people advise to trade without stop-loss, that is outstay loss in the hope that the price will close the gap sooner or later. But, as we saw above, the process of closing the gap may take quite a long time, and the current loss may amount to more than one hundred points. Also, there is a possibility, although unlikely, that the gap will not close at all (see the chart of AUD \ USD from 12.09.2010), which naturally leads to a loss of a deposit or to a huge drawdown.
So, in my opinion, to date, trading on gaps carries more risk than expected profits.