Forex Gap Trading

When important news hits the Forex markets after hours, the market gaps up or down upon opening the next day. What does this mean and how can Forex gap trading be profitable? There are major Forex markets in London, New York and Tokyo. Because these three markets are scattered across the globe, one can engage in live Forex trading virtually around the clock. However, any individual market like New York is closed over the North American night and reopens at the start of each business day. Let us say that we are trading the US dollar versus the Euro. We buy Euros with dollars and then repurchase dollars with Euros. After hours in New York there is an important pronouncement by the head of the European Central Bank. The bank is going to lower interest rates in an effort to stimulate the lagging Euro Zone economy. The market reaction to this in London is that the Euro falls versus the dollar. This happens when the London market is open. However, it is 2 am in New York and the market is closed. When it opens the first bids for buying Euro with the US dollar are substantially less than upon closing the previous day. The Euro gaps down versus the dollar at the opening of the market. If you are trading Forex with candlesticks there may still be profits to be made even though the market seems to have made its move.

Forex Gap Trading

The fact of the matter is that when there is a large move in the Forex markets it may be the beginning and not the end of potentially profitable price action. For example it is possible to forecast uptrends with the bullish engulfing signal. This Japanese candlestick signals starts by gapping down at the end of an establish bear market! In this case, hypothetically, the Euro has been falling versus the dollar for weeks. Then there is an especially bad day for the Euro as it seems to go into free fall. The next morning, in New York, the Euro gaps down even further upon opening. Those skilled at Forex gap trading do not assume that this is the end of all price action. Rather they wait to see what comes next. What may happen is that the Euro may rise throughout the day, erase the losses of the previous day, and go up even higher. This following up day “engulfs” the first day, hence its name, the Bullish Engulfing pattern. Candlestick traders recognize this signal composed of an established bear trend, a large down day, and an engulfing, huge, up day.

A conservative candlestick trader may wait to see if the next day confirms a bull trend by trading up even more. However, Forex gap trading in this case tells us that the downward gap was just the last gasp of a bear market and the beginning of a substantial new bull trend for the Euro. If you learn Forex trading with Japanese candlestick signals you will often see gaps in the market and often see that the gap is the beginning of substantially more price action and potential profits.