In this post, I will be sharing a rather rare but ” Profitable ” forex trading strategy with You guys.
This is a trading strategy which takes advantage of the ” Gap/s ” in the forex market …( When You spotted one such ” Gap/s “…)
As You might already know that the forex exchange is a 24 hours market and that is why ” Gap/s ” is hardly seem in this market but ( maybe ) occasionally on Monday when market is open again after the break over the weekend.
The strategy I am sharing below is one that takes advantage of such Gap/s in the market and I managed to nail a nice 108 pips trading it.
Before I go straight into the ” details ” on this Gap/s forex strategy……do allow me to share a personal story here first with You….( don’t worry…just a short & sweet one…* smile * )
If You have been reading on my Forex Trading Empire blog, You would know by now that I am a strong believe of PRICE ACTION Strategies.
In fact, it is by mastering such Powerful Price Action strategies that gave me a major turning point in my forex trading ….and with that….I mean ” finally get to see the results I long for & became a successful forex trader “…
( …Which ultimately enables me to quit my day job as a technician and trade forex full time…! )
So having known that I have sort of ” already mastered ” Price Action trading, some fellow readers actually wrote in to me asking for strategies to trade such ” Gap/s ” in the financial market.
And as I mentioned above that in the forex market, Gap/s is actually very rare except on Monday perhaps ….( or after a long holiday break for the market…)
Hence, these readers who wrote in to me are mostly ” stocks ” traders ! * grin *
Yes….in the stocks market, seeing such Gap/s is like seeing the ” forex market WIHOUT Gaps”…
It is THAT COMMON in the stock market..
This is so because the stocks market operate just like a day job kind of timing - Meaning the market would be closed when it is time for the employees to knock off….
Hence after this so called ” off ” period and market re-opened again, it is very normal to see Gap/s in the market for stocks traders..
So having read through their request, I begin to look out for a GAPPING market condition in the forex market then…..as I would like to write about a forex trading strategy on that to share with You guys..
Although it is rare to see Gap/s in the forex market, but once You learn this strategy from reading this post…..AND if You spot a Gap in future, You would know HOW to grab those pips and add some nice profits to Your pocket too !
Well….unless You don’t like to win and nail profits from the market….else I am sure any fellow forex traders would be more than keen to learn a forex strategy that works ( like a bang ) right ! )…* smile *
Alright….having done with my story…( told You it’s short and sweet ), now let’s get into the main strategy to trade the GAP in the forex market now..
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Trading The GAP/s in the Forex Market - Step By Step Strategies Revealed
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Again….just like what I mentioned in some of the forex strategies posts…
I will ” try ” to make it as easy & simple to understand as possible ok……( of course not too long winded I know…)
Just make sure You really read till the end of the post and read every single word so that You can grasp the entire concept of this strategy..
If needs to….just read 2nd…3rd….or even 5th times - TILL You understand …..* smile *
It’s FREE to do so anyway….* grin *
OK…..let’s get serious now…
Here’s an screen-shot of where I ” Enter & Exit ” for this strategy - With Stop Loss planned too :
( Nailing 108 Pips Profits )
Trading Gap Forex Strategies
If You have not trade any ” Gap “ that happens in the forex market before and wonder is it hard to master at this point of time..
Then I shall assure You that it is NOT That Hard once You can understand the ” concept and psychology ” behind this strategy.
Read on below..
It is an absolute fact that almost everything in this world would undergo a state of change almost every single second..
For example :
- Human would age….
- Those cute little babies would grow day by day …
- After the rain ….there would be sunshine..
- Almost nothing could possibly stay the same state forever…( generally )
However….there are some exceptional here though..
And these are the ” PSYCHOLOGY ” of the market..
As long as it is humans trading the market….there bound to have both FEAR & GREED involve..
This is especially so when we are trading REAL MONEY here…..and there’s a BIG POSSIBILITY that anyone can lose money in the process……and basically Nobody likes to lose money in anyway….
Hence, the elements of FEAR & GREED would always EXIST in any financial market….and especially true in Forex - A market where the volatility is so high !
So for this forex trading strategy that take advantages of the ” Gap/s ” in the forex market, it capitalizes on the Human Psychology as well..
Which explains why when there is a GAP UP , most of the time this GAP would get filled by the SELLERS ( bearish sentiment ) in no time….
This means when You can also read certain Price Actions & ” hints ” in the market, You would know whether how to trade this strategy profitably too.
Read on below as I share how to extract the ” hints ” from the market to put all odds on my side…
In fact, on that particular Monday when the forex market opens again, only the few EUR pairs are having such Gap/s…
So why do I decide to trade the EUR/JPY…..but NOT the EUR/USD then ?
Here’s my reason :
I do not like to trade currency pairs which are TOO CLOSELY associated….
Which in this case , the EUR is the common ” based ” currency….so they are definitely closely related…
If I decide to trade both pairs, then the risk would be DOUBLE as well….as both tend to move in the same direction……so if I am wrong…..both would give me headache at the same time…..!
As a full time trader now, I treat the ” RISK ” that I would encounter with extreme cautious and of course I would respect such RISK too…..
I always believe in NOT going against RISK that can be foreseen and NEVER PRESUME everything would be fine……
So for this situation, I decide to choose the EUR/JPY to trade because by looking at the USDJPY chart, it is a clear DOWN TREND / DOWN CHANNEL during that period…
Like this :
From the above screen-shot, You can also see that the USDJPY pair is in a nice DOWN CHANNEL for that period..
When USDJPY is in a DOWN-TREND….
Is USD STRONGER…….. Or JPY STRONGER ?
Am sure You would agree that it’s the JPY that is STRONGER ….right ?
JPY is Stronger than the USD ( which is weaker )…..that’s why it is a DOWN TREND for that period..
So since I know that generally the JPY is stronger than the USD…
Which do I choose to ” SHORT ” then ? Is it the EURUSD……OR EURJPY ?
Of course I would choose the EURJPY to ” SHORT / SELL ” again for this strategy right since JPY is stronger and that would give me a better chance to succeed..
In forex trading, it is all about ” Knowing ” the PICTURE in the market and then use all these small proven hints to help You make better ( Profitable ) trading decisions end of the day….* smile *
If You are not trading with such confidence yet…..don’t give up…..because I believe if I can do it….You Guys Can Do It Too ! ( and I am not a university graduate ..NOT even having any financial background )
Hang on to Your goals in life and don’t let go…..that’s already half the battle won !
Successful people might not be as intelligent as You are…..but because they DARE to dream big and then work towards that BIG GOALS in life & Achieve SUCCESS…..no matter how hard it is……agree ?
Same for mastering this forex trading too…..! * smile *
Alright….enough of that ” positive thoughts ” stuff….let’s get back into the forex strategy on GAP.
Now that I decide to trade ( SHORT ) the EURJPY instead of the EURUSD ….though both pairs are seen with GAP/s in the market..
Next are the most critical elements to consider and they are namely :
1) How Do I Decide When To Get Into the Trade To SHORT ?
2) How Do I Decide What ” Take Profit ” Target To Aim For ?
3) How Do I Decide What ” Stop Loss ” Target To Use As Well ?
Next coming up, I would be sharing on all these in a step by step manner…
Read On…
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How Do I Decide When To Get Into the Trade To SHORT ?
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Before anything, I need to highlight an important point here first about this EURJPY pair..
It would be good for YOU to consider this ” important point ” that I am sharing now for Your own tradings in future - To increase the odds of winning for Yourself….
You see….as I mentioned earlier that I would be ” SHORTING / SELL ” the EURJPY for this GAP strategy..
BUT….what if I tell You that this EURJPY pair is technically in an UP TREND ?
Does that means I am trading Counter Trend ?
Is that very risky like what other traders said so…?
If You are also wondering ” how uh “….
Don’t worry for now….as after You read my step by step explanations below, Your doubts would be all cleared by then….* smile *
Let me show You the Up-Trend/ Up Channel ( Screen Shot ) of This EURJPY :
As You can see too….this EURJPY is generally in an Up Trend as shown by the UP Channel ..
So although I am taking advantage of the ” GAP ” that happened in the market…..I cannot just simply jump in and trade without confirming my ” rules & checklist ” though….
If any trader simply ignore to go through the rules and checklist and hope that everything would be fine end of the day….then that’s the WRONG way to trade I must say..
Long term wise……this type of trader would only SUFFER…..and most likely GIVE UP this forex trading entirely because of the FEAR after losing all the money..
So are You one such trader ?
Hmmm……Not too late to know what’s RIGHT though…..* smile *
For me, I like to use ” CONFLUENCE ” from the market itself to convince myself that it is a set - up that is worth trading..
Yes…..that would include weighing all the RISKS INVOLVE….as well as the Rewards that can be expected…
Here’s how I do it :
1) Although this EURJPY is in a general UPTREND……BUT the level that I intend to SHORT actually coincides with the previous ” Critical Resistance Level “
( This is the resistance level that we saw about 400 Pips PLUNGED previously..)
So it is definitely one resistance level I would watch for again this time.
Here’s an illustration to show this ” Critical Resistance Level ” :
2) Furthermore, this level that I would like to SHORT actually ” also ” touches the Upper Limit of the channel I drawn ( refer to illustration above )…
And the best thing is that a perfect ” PINBAR ” is seen at that upper trendline too - With The Price FAILING To Close Above that trendline !
This is definitely a good sign of a ” Reversal “ for me to SHORT….* smile *
But of course, with the PINBAR alone, it is NOT good enough for me to SHORT yet…
I need the next candle to be a ” BEARISH closed ” to confirm….
And just as I anticipated, after 4 hours, a BEARISH candle closed is spotted - Which is exactly what I am waiting for as a form of ” confluence ” indeed.
As such, I SHORTED 2 lots right at the closed of that Bearish Candle ..
Here’s a screen shot to show :
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Next……How Do I Decide What ” Take Profit ” Target To Aim For ?
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Too many traders commit the mistake of using ” any number ” they like while planning the Take Profit Level WITHOUT considering whether is it REALISTIC or not based on the Price Action in the market.
That is truly wild guessing or just trying their luck ….and hoping that everything would be fine…and their so called ” simply guessing numbers ” kind of Take Profit target would be hit somehow…
Hmmm….I do not like this way of trading definitely as I prefer to be in control instead of ” Hoping that everything would be fine “….
In order to be in control and feeling really confidence about any position I take…..of course I need to use proper techniques to analyze the Price Action on the market for my ” numbers ( Take Profits Target in this case ) to be used…
Here’s how I try to ” Anticipate ” what would happen next based on the market flow ( & trend characteristic ) :
Considering it is an uptrend channel for this EURJPY pair…
It is important that we consider whether the Take Profit target we planned to aim for is realistic or not…
( And NO…..we don’t do that by wild guessing or relying on luck …)
But try to anticipate what the market is likely to behave next based on the current Price Action..
Yes….in order for anyone to ” anticipate ” the way I do….it is paramount that Your chart reading and technical analysis skills must be good to a certain standard..
Or else…it would be hard for You to dissect the market like I do…
If You are not at that level yet…..don’t worry….just keep reading from my forex strategies and soon You will get more and more familiar in the process.
Ok…..since I am SHORTING this pair and it is technically on an uptrend…….BUT I already have all the ” confluence ” in place to support my SHORTING BIAS…
It is time to plan my Profit Target now…
Let me first consider the WORST CASE scenario ….
If this drop is just a retracement to the 50% level……can it hit my Profit Target ? - This is my first consideration since I am planning to exit right at the BOTTOM OF THE GAP.
And if You refer to the above screen again, You would see that even if it is just a RETRACEMENT to 50% before resuming Uptrend……My Profit Target Could BE HIT though…….which is good ~!
Of course the other situation would be that Price would plunge to the Lower Channel limit before bouncing up again….BUT this is not my concern as I am only trading the GAP.
So upon considering the worst case scenario, I planned my Take Profit target ( TP ) at the Price 125.900
Here’s an screen shot to show :
Do note that the ” ACTUAL BOTTOM Of THE GAP ” is lower than 125.900…..but I like to give it some allowance by NOT planning exactly at that edge…
After all… forex trading is just a game of WINNING the probability as many time as possible ….again and again to make money every month.….right ! * smile *
Now that we know we are SELLING / SHORTING this EURJPY at Price 126.98…
And aiming the Take Profit Target at Price 125.900..
What else we need to do next ?
The STOP LOSS point of course…….( unless You don’t like to use one…..! Hmm….But I DO HOPE You at least have a Mental Stop Loss Level …….)
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Last Point…….How Do I Decide What ” Stop Loss ” Target To Use As Well ?
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When mentioning about these words ” Stop Loss ” to traders…..it would somehow trigger mixed feelings in each individual…
Why so ?
Because some traders would ONLY feel comfortable when they are using a pre-set stop loss level….
Whereas some others might be comfortable with just a ” Mental Stop Loss “…
On the other hand……some would even go WITHOUT a Stop Loss level - BECAUSE they have been getting hit and hit again until it made them lose confidence with using a Stop Loss now……Arghh!
I must admit that placing Stop Loss level ” Correctly “ can be a REAL CHALLENGE & TRICKY for most ( struggling ) traders.
Using too tight a Stop Loss…..You might get hit….again and again only to see the trend goes the direction You previously wanted..
On the opposite, if You choose to use a bigger Stop Loss, You could not achieve a Good Risk/Reward ratio for Your trades…….
Hmmm…..that’s really frustrating I can understand…… as I also suffer from these problems years back before I succeed with this forex trading.
But once I understand these 2 elements, I begin to see good success :
Element #1 ) The sole purpose of placing a Stop Loss is to ” Protect Our Capital Should The Trade Goes Against Us - Because We Are Wrong About The Direction “
Element #2 ) The Stop Loss level should be placed at a level that the Price is NOT / Less Likely To Breach..
If You allow Yourself to understand these 2 elements and adhere strictly to them for all Your trades…..
…..then Your trading confidence would improve significantly and the fear of seeing Your Stop Loss hit again and again previously would be progressively diminished too by then…
So for this GAP forex strategy, how do I decide ” where ” to place the Stop Loss level in order to obey the 2 essential elements I shared above ?
Very simple for this set - up..
Remember I mentioned these 2 factors above :
1) Our Entry price coincides with the Previous ” Critical Resistance ” level..
2) Nice PINBAR spotted bouncing off the Upper Channel Line..
Based on these 2 ” facts “….it is definitely good enough to place the Stop Loss just above that PinBAR !
And I like to give about 10 pips allowance from the tip of the Pinbar just to give it some reasonable room to breathe.
So the calculated Stop Loss level is set at Price 127.58 ( 60 Pips from entry price )
Here’s a Screen Shot to help You Understand more :
A nice and tight 60 pips Stop Loss place above the PINBAR…
And aiming for 108 Pips of Take Profit target…..
This gives us a ( reasonably ) good Risk/Reward ratio of about 1 : 1.8
Each of these analysis were done before the closed of that 4 hourly Bearish Candle..
And it only takes me about 2 minutes to derive all these numbers and then made my final decision of whether should I trade this set - up…..* smile *
Of course it might look like alot of things to consider here….but once You get better and more confidence through practice…all these would then become 2nd nature to You….
Just like driving…You don’t really take so long to think as compared to the period while You’re learning how to drive…..agree ?
Same thing here applies for forex market analysis….
Of course the main key here is to learn the ” proper techniques ” to do so….and Price Action is the answer….no doubt!
And after about 15 hours of trading….the Profit Target for this trade was hit at Price 125.900.
( for a nice profits of 108 pips )
Here’s the screen shot to share :
Here’s the earnings proof with ” Entry , Take Profit & Stop Loss ” for this trade :
( click to enlarge )
Forex Gap Strategy Earnings
Using this ” Gap ” forex trading strategy, I nailed 108 pips which equates to a nice Profits of USD $2321.82. ( As shown above )
Although ” Gap” is not very common in the forex market as I mentioned right at the start of this post…
BUT by equipping oneself with a proven strategy to trade such GAP ….AND when You happen to spot them in future, You would also know how to trade such ” Gap ” confidently then - Which is definitely an advantage.
Most importantly, You would know what are the ” important factors ” to consider too before deciding whether is that set-up a High Probability one……
And You would also know how to calculate and take all foreseen ” RISKS ” into consideration too….( which is very crucial for long term trading success )
Of course, do not trade LIVE until You are very confident with this trading strategy though..
Practice it on a DEMO account first till You’re confident and ” Really Confident ” is advisable…* smile *
One thing to note here is that if You are competent in trading Price Action strategies already….then trading such strategy which takes advantage of the ” GAP ” in the market is definitely BREEZE to You then…
So do read up more on Price Action if necessary ya….
I shall conclude here for this post..
And I hope You have learn a new ( proven ) forex trading strategy to be included in Your ” strategies basket ” after this…* smile *
Thanks for reading this far…
Happy Trading and spotting the ” GAP/S ” !
