Trading Market Gaps in the Forex Market

Filed under: Learn Forex Trading |

I noticed a very large and pronounced market gap on the NZD/USD forex currency pair last night (the pair for the New Zealand dollar and the United States dollar) and I wondered whether it might be a good trade opportunity. This is not something that I would normally trade, but this gap was so large ad obvious; and it is well documented that such gaps have a high probability of being closed, as markets tend to not like any gaps and often fill them quite quickly.

 

Figure 1.

Figure 1.

If you take a look at Figure 1, you will see the daily chart for the NZD/USD pair. What you can see is that price opened much lower on Sunday night than the close of Friday night, and this created what is known as a gap in the market. My idea was that this gap would likely be closed during today’s session. So how could we have played this? One way could have been to enter immediately at the open of Sunday’s session, and put a target at the low of Friday’s session, with a stop loss placed half the distance away from the target, so that we create a risk-reward scenario of 1:2. Had we done this, the target would have been met for a nice 2% rise on the bank (with a 1% risk).

 

Figure 2.

Figure 2.

If you also take a look at Figure 2 (the 1-hour chart for the same NZD/USD pair), you will see how the market has reacted to the low of Friday’s session. Market gaps often produce good areas of support/resistance, and this seems to have been the case here. A bearish engulfing pattern is forming right at this level on the 1-hour chart, signalling that the bearish momentum is about to resume.

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