Gaps are formed during a disruption in the normal functioning of the market. Such trading is associated with certain risks, so it is not recommended for beginners on the exchange. At the very beginning of a trader’s journey, it is necessary to prepare well. Moreover, this applies to both the moral component and the technical one. This will allow you not to deviate from the developed trading rules. With the advent of binary options, new opportunities have opened up for traders with previously known risks. There is no need to wait for a given profit on an open position. When trading binary options, even the oldest strategies, which no one has used for a long time, can demonstrate positive dynamics of deposit growth.
This article will focus on the gap trading system. We will find out how high the potential of this approach is when trading options. Before starting to consider the strategy itself, it is necessary to find out what gaps are and for what reason they are formed.
Gaps for beginners
The concept of “gap” means the appearance on the market of an abnormal gap between quotes. In other words, the opening price of one period differs significantly from the closing price of the previous one. There is no specific gap between quotes to be able to say for sure that it is a gap. Therefore, this term is usually used to describe any significant gap. Such market situations are of interest to traders.
There are several reasons for the formation of gaps. In most cases, a gap appears between trading sessions . In the Forex market, this situation occurs when the session opens on Monday. This is also due to the large number of orders that were opened by traders over the weekend. As you know, the market is not active on weekends. During this time, the demand for currency increases, which leads to the accumulation of orders. When the market opens on Monday, all orders begin to be executed, and a gap appears on the chart. Gaps appear on the stock market, for example, because one of the companies announced bankruptcy over the weekend. After the publication of such information, traders begin to take certain actions to rearrange orders, as a result of which the price of the company’s shares on Monday may be an order of magnitude lower than the closing price of Friday trading.
In other words, gaps are formed due to changes in market sentiment among traders due to the presence of certain fundamental factors. A gap may occur due to an unexpected market event, a disaster, a political event, an act of terrorism, or a new plan to save the economy from one of the representatives of the central bank of a country.
Of course, most often gaps form after the weekend or at night. But in practice there are other situations. The gap between quotes can also be found on lower timeframes. The consistency of the flow directly depends on the liquidity of the market. The absence of one can cause strong price jumps.
Do gaps always close?
One of the features of gaps is their desire to close the gap. This behavior of traders is classic along with price movement in a channel or a rebound from a round level. After a gap appears, the price movement is somewhat reminiscent of a sea wave, washing away all the pending orders of players who have not yet had time to understand the complexity of their situation. On the chart of a trading instrument, this looks like a natural pullback. Moreover, the rollback continues until the price becomes “fair”.
We found out that after a gap forms, the price tends to close the gap. But this doesn't always happen. In some cases, the price movement continues in the direction of the gap. In most cases, this situation occurs during a strong trend along with fundamental confirmation.
Tradable assets
Gaps in the Forex market appear quite rarely. Most often this happens when the trading session opens on Monday (the opening of a new week) due to the accumulation of a large number of pending orders. In addition, gaps can be caused by economic news or fundamental forecasts of leading analysts. Therefore, it is best to trade gaps at the opening on Monday or before the release of important economic news. In this matter, it is very important to choose the right trading instrument. The most effective currency pairs when trading gaps were EURJPY, GBPJPY, EURUSD and GBPUSD. Price return for these instruments is observed in 70% of all cases.
But the gap in quotes on the stock market can be called a rather trivial phenomenon. A gap can be seen even within one trading session due to the low liquidity of the asset or at the very beginning. Another advantage of gap trading in stocks is the wide range of tools with which you can perform analysis. However, most brokers provide traders with a set of the most popular instruments, of which there are about 20.
Practical use of the system
The advent of binary options has greatly simplified gap trading. There is no need to predict how many points the asset price will move towards the gap. You can make a profit even if the gap is not completely closed. You can also feel the benefits of trading binary options in the opposite situation, when the price continues to move towards the gap. It doesn't matter how long the price goes. Losses will always be known in advance.
It is best to trade gaps using classic options or touch options. The rules for entering the market are as follows:
- We find a gap.
- We wait about 30 minutes.
- We buy an option towards the gap.
- The gap between quotes must be at least 20 points.
- When trading Forex market instruments, the expiration time should be within 5-8 hours.
- In the case of stocks, the expiration time must coincide with the end of the trading session.
- The optimal expiration time is determined experimentally.
It’s not scary if after buying an option the price still continues to move towards the gap. After some time, it will turn towards the gap, testing support or resistance levels on its way (depending on the direction of trading).
The ideal option is a situation in which the instrument immediately begins to move towards the gap, thereby restoring its unjustifiably lost positions.
Trading stocks provides more opportunities, but the percentage of closed gaps is slightly lower. The number of losing trades is greater than in the case of currencies. But the total number of transactions can offset the increased losses. The stock market provides enormous opportunities, so you can easily find an instrument that will meet all your requirements.
Conclusion
When trading gaps, it is very important to choose the right broker . It is worth paying attention to the instruments it provides and the start time of trading on Monday. This method works well on binary options. There is no need to waste time conducting technical analysis .
Can't figure out how this strategy or indicator works? Write about it in the comments to this article, and also subscribe to our YouTube channel WinOptionSignals , where we will definitely answer all your questions in the video.
See also:
Binary options trading training
The best binary options brokers of 2018
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