Market gaps most commonly occur when price moves quicker than the market or, in the case of weekends, when the market is closed. Things happen in the market over the weekend so when Sunday evening trading opens, price has normally moved or "gapped" away from the close price on Friday.
I don't trade every gap I see in the market and that is because of how the gap forms as part of the prevailing trend that is showing. I always try to trade with the trend and use market gaps as a discounted way of entering into a normal trend following trade.
This example is on EURUSD .
The market gaps upon opening and is now around 20 pips higher than the close price on Friday. This is good because the price has gapped up when I have the marked on the chart with the lower highs and TL. A gap up means I can enter short and be onside with the current . This seriously helps with profitability and success in the long term.
My confluences for taking this trade are:
- showing over bought.
- Price is around daily level.
- Lower highs and lows.
I always place my Stoploss 10 pips above the current high when taking my trades and I have used this same method for these quick gap trades.
My TP1 is always set to the Friday close price. This means the gap has been fulfilled.
TP2 is set at the daily S1 level. This is taken from my day trading strategy because if there is a lot of momentum then it makes sense to ride it out for more profit.
TP3 is set at the daily S2 level if there is still enough momentum to make it there.
- If price makes it to TP1 then that is a very simple 2:1 trade.
- TP2 would make the trade a 4:1 trade.
- TP3 would make this trade over 6:1 R:R which is crazy but sometimes possible if there enough momentum in the markets.
Thanks for reading and I hope this helps at least a few of you to start spotting and trading market gaps. They really are very good to help you get a head start on the week ahead and lock in a few % profit before Monday has even began!