FX TECHNICAL ANALYSIS
Detect any major price pattern formations previous to the gap appearance: Price patterns play an important role in gap trading. The patterns previous to a gap can provide us with vital information regarding the current gap such as: the potential profitability of the gap, the meaning of the gap, and even the likeliness for the gap to be filled during a correction.
Money & Risk Management Needed for Trading Gaps
Te effective implementation of risk mitigation and money management techniques is crucial for trading market gaps as these can oſten lead to volatile and uncertain market conditions.
Scaling out of a gap trading opportunity: utilizing more than one take profit level or “scaling out” is an advanced money management techniques which allows you to secure partial profits while still being in a price move. For instance, if a gap is 100 pips, a trader can create one take profit to close 25% of the trade aſter price reaches 25 pips, and close the rest of the trade as price reaches 75 pips.
Establishing realistic stop loss & take profit target levels: as in any other trading opportunity, finding proper stop loss and take profit levels will be critical for successful trading. Te combination of
technical analysis,
gap trading rules & tendencies, and effective money management needs to be applied when selecting stop loss and take profit levels.
42 FX TRADER MAGAZINE July - September 2013 Examples of Trading Gap Opportunities
Chart 4 – example of a runaway or measuring gap in the EURUSD, four hour timefame
Chart 5 – an example of a breakaway gap in the AUDUSD, four hour timefame
Tis trade represents a high probability gap trade as several technical indications are found to support the filling of the gap.
Conclusion: Are Price Gaps Right for Everyone?
Te first step to defining whether or not gaps are appropriate for your investing approach is to understand the type of trading you will be performing. Gaps are short term trading opportunities and are more likely to be profitable in lower timeframes such as the four hour
and one hour charts.
Gap trading requires the investor to perform effective technical analysis, employ efficient trading execution and management, and the development of a risk control plan. Tis will allow the trader to filter the low probability from the high probability trades.
Remember, it is not the quantity of your trades that truly matters; it is the quality.
Jose Molina
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