Gap Trading: Are Potential Profits Worth All the Risks?

What do you know about gap trading? Did you practice it? What were the results?

Most novice and even advanced traders treat this technique with a certain degree of doubt and tentativeness. The point is that it is hard to predict when such a gap will close. So, many traders do not want to put their money at risk. Besides, among experts publishing their materials on open sources, there is also no single opinion on whether gap trading is worth trying or not.

That is why the team of one of the most influential informational platforms for brokers ― Traders Union ― decided to conduct deep research ― “Gap trading. Should I trade?” ―  to find out how profitable this strategy is. The priority of this media is to educate both novice and experienced traders, help them maximize their profits, and avoid any losses or hidden pitfalls. For that, they regularly perform expert studies involving a huge number of top traders of different ages and genders from all corners of the world (for the sake of objectivity). So, they concluded that such a disputable issue as gap trading requires extra research and clarification.

Hence, they involved 2200 traders collaborating with the brokers from their top list and asked them a series of questions about the use of this technique.

However, let us start with the basic knowledge about this trading method so that you fully understand what we will be talking about.

The Essence of Gap Trading

In short, this method implies taking advantage of the differences between rates at which time frames are closed and opened.

In most cases, such gaps appear on the weekends. The point is that the Forex market does not work on Saturday and Sunday, which leads to the accumulation of orders. Then, when the market opens at midnight on Monday, all those orders are performed at once. If there is an excess of orders waiting in line, that causes a significant gap between prices. And, as there is no sufficient demand/supply, traders have no other choice than to open positions at the current prices. However, such a gap may also occur due to varied big news. For example, prices of assets may change dramatically after significant events in the macroeconomics sphere, like collapses in fuel prices, political crises, natural catastrophes, etc.

Certain players in the Forex market manage to react to such events more quickly and take advantage of the available price difference. Still, there are many traders (especially beginners) who doubt whether that is worth the risk as it is well-known that such situations tend to be short-term. Namely, according to the research by Traders Union, around 70% of gaps close rather quickly.

Which Gaps Can a Trader Take Advantage Of?

Specialists name the following types:

• Common. They are characteristic of the slack periods on the market when there is little demand for certain tools or assets. In such conditions, any order can cause a gap. However, most traders do not show much interest in them.
• Breakaway. Such gaps are not so frequent. They appear when the price finishes a certain movement and often warn about the upcoming dramatic rate changes. They usually attract much attention on the part of traders and provoke raises in sales volumes. As the rule, they do not close completely.
• Measuring. In most cases, they are detected in the mid-period of the market trend and show that this trend is going to continue. So, one can monitor such gaps to predict future changes in the market.
• Exhaustion. They occur at the end of the trend so traders treat them as a signal that it is time to open the opposite positions. Obviously, exhaustion gaps appear after measuring and breakaway ones.

Should You Try Gap Trading?

 So, after you studied the essentials of this method, you are likely to wait for expert advice on its riskiness and profitability. And the team of Traders Union has collected the objective data about it. They have found out whether the successful traders taking part in the study make use of such gaps and how much income that brings to them. Want to learn the latest data on the issue? Then, go to their research article.