Preface

A gap is a term used in technical analysis to describe a price movement in which the opening price of a financial instrument is higher or lower than the previous closing price. If there is a blank space between two adjacent candlesticks, it indicates that no trades took place at those price levels. Gaps occur when there is a significant change in the supply or demand of an asset, leading to a sudden increase in price.

What is Forex Weekend Gap Trading？

A forex weekend gap refers to a sudden price change on a financial asset's chart, where there is an unusually large space between two candlestick prices.Weekend trading in forex typically features wider spreads and reduced liquidity, leading to greater volatility. Therefore, trading forex over the weekend carries higher risk. From a technical analysis perspective, a forex gap occurs when the Sunday opening price is significantly higher or lower than the Friday closing price. From a fundamental analysis perspective, a forex gap indicates that no trades took place within that price range. Forex weekend gaps usually appear after major news announcements.

What Causes the Forex Gap？

Forex gaps can form at any time, especially during periods of high volatility and at the start of a trading day. It is well-known that forex trading operates on a global market. Although most forex brokers close over the weekend, trading still occurs in certain regions. Therefore, as we go through the weekend, forex prices continue to change, making forex gaps more likely to appear when the new trading day begins. Here are common reasons for the occurrence of forex gaps:

Important Data Releases: When economic data is released (such as U.S. Non-Farm Payrolls, CPI), forex prices can experience significant volatility. If the data meets expectations, it usually stimulates a short-term price increase; if the data falls short of expectations, prices often drop sharply in the short term. Forex gaps are most likely to appear at these times.

Overnight News: Overnight news refers to major events that occur while the market is closed, such as geopolitical events, Lehman Brothers' bankruptcy, or Brexit. Such events can cause significant price fluctuations following the news report, leading to forex gaps.

Changes in Market Liquidity: Lower market liquidity increases the amplitude of price fluctuations, making exchange rate gaps more likely. When there is significant news, the market may struggle to match investors' orders at optimal prices in a short time, especially in a low-liquidity environment. This often results in large exchange rate gaps.

Types Of Forex Weekend Gap

Although trading volume is low and liquidity is poor in the forex market over the weekend, trading opportunities do exist. Forex weekend gaps can serve as an important guiding tool for weekend forex trading. To effectively use gap analysis, we need to understand the different types of forex weekend gaps. Each type can help us trade forex correctly. The following four types are commonly recognized in the market:

Common Gaps

This gap frequently appears in the market and, compared to other types of gaps, usually has lower trading volume, making it easier to fill in the future. As shown in the figure below, the position marked 1 is a Common Gap.

Breakaway Gaps

This gap occurs when the price breaks out of a consolidation range after a period of oscillation, accompanied by significant trading volume. These gaps are less likely to be filled in the future because the surge in trading volume after a long period of consolidation indicates a strong trend. As shown in the figure below, the position marked 1 is where the Breakaway gap indicates.

Runaway Gaps

Thisgap typically appears in the middle of a trend and indicates the potential for the trend to continue. This type of gap is also difficult to fill in the near future, as the trend is not expected to change in the short term. The chart below shows the exchange rate of the Euro/US. We can see that there are two gaps in the upward trend. The gap number 2 shows the location of a Runaway Gap.

Exhaustion Gaps

Thisgap usually appears at the end of a trend and is typically smaller in size compared to a breakaway gap. This type of gap is often accompanied by high trading volume, suggesting that market sentiment may change in the short term, making it easier to fill compared to a breakaway gap. We can see that a gap appeared at the top of the uptrend.The point marked 2 in the picture below is the exhaustion gap. Then the market starts to fall in the future

Forex Weekend Gap Trading Example Analysis

Before engaging in weekend forex gap trading, it is essential to understand the underlying theory. Forex gaps are often caused by a large influx of capital either buying or selling in bulk. The premise of the weekend forex gap strategy is that investors believe the market tends to fill the price gap. This means traders will open positions immediately after the market opens on Sunday, predicting that the market will fill the gap in the future. Here, I'll use a real-life case to explain how to use the weekend forex gap strategy for trading.

Step 1: Identify the Forex Gap. We need to immediately assess whether there is a significant gap between Sunday's opening price and Friday's closing price as the market opens on the weekend. This assessment can often be anticipated before the market opens, considering factors such as major news and events over Saturday and Sunday, and the latest economic data, all of which can impact Sunday's opening price. Below is a chart of the USD/JPY exchange rate, where we can clearly see a weekend forex gap with a significant drop between points 1 and 2.

Step 2: Open a Trade. If a gap is present, you can proceed with the trade. If there is a gap up, you can open a short position, and if there is a gap down, you can open a long position. However, it's crucial to wait for the right opportunity before opening a position. For example, if the market gaps up at the opening, wait for the previous Friday's short sellers to hit their stop-losses before entering the trade. Below is a chart of the USD/EUR exchange rate, showing a gap up. At the opening, you need to wait for the right moment to enter a short trade, as the gap is likely to be filled in the future.

Step 3: Set Take Profit and Stop Loss. The mark of a professional trader is not how much they profit but whether they have a strict risk management system. Before entering any trade, it is crucial to set take profit and stop loss levels in advance to prevent unexpected events, often referred to as “black swan” events.

Step 4: Monitor the Trade. When engaging in forex gap trading, it's essential to closely monitor the price movements throughout the trading session. The speed at which the gap is filled can vary significantly under different circumstances. Sometimes, it takes a long time to fill the gap, leading to unexpected losses for traders. Therefore, it is necessary to stay vigilant and make informed decisions based on real-time market changes.

Pros And Cons Of Forex Weekend Gap Trading

Conclusion

The forex market has seen rapid development in recent years, with an increasing number of forex investors. However, the vast majority of traders lose money. Understanding forex gaps is crucial for investors, as gaps are often accompanied by increased trading volume, indicating potential opportunities. For those who wish to trade forex over the weekend, the forex gap strategy is an excellent approach. While this strategy can yield substantial income, traders must also be mindful of its risks. Managing risk effectively is essential for achieving long-term profitability in forex trading.

FAQ

Is the weekend forex gap strategy guaranteed to be profitable？

Not necessarily. The forex gap strategy is just one of many trading methods, and no strategy can guarantee profitability. Only by thoroughly understanding its characteristics and strictly controlling risk during trading can investors potentially achieve long-term profits.

Will all forex gaps be filled？

Not all gaps will be filled. Many assets with strong market trends may not fill their gaps. Gap filling is influenced by various factors, including investor sentiment, market conditions, and major events.

Are smaller forex gaps easier to fill than larger ones？

Smaller gaps are generally easier to fill compared to larger ones. Smaller gaps typically come with lower trading volumes, and trends driven by smaller volumes are less durable, making them more likely to be filled.