Gap Trading with News Sentiment Indicators

In Acuity Trading’s continuing series of educational videos, today we want to take a look at Gap Trading.

If you’re not familiar with it, this is what a gap looks like.

You might find these when the markets open Monday morning in Auckland or Sunday night in London when something dramatic has happened over the weekend. As we have seen, this could result from an opinion poll that caught an entire nation off guard, a geo-political event, or news from a central bank. These are not restricted to weekends, of course, but they are rare during the week.

In trading however, there is an expression that goes, “Gaps always get filled” That is to say that price will always retrace to return to pre-gap levels.

Does this really happen? Very often, it does. If we take a look at a few examples, we see that it’s often true. USDCAD, USDJPY, Cable, here’s another Cable, and EURGBP. But, what about this one? This price action on another EURGBP from earlier in the year showed no sign of returning to the downside. So? What makes this one different from the others? Simple! Support and resistance.

In all these successful cases, price was within and bounced off support or resistance and you would want to enter the trade on a confirmation of the bounce.

In the case of EURGBP the gap was actually well above this previous line of resistance which very quickly became a line of support.

Here we have a couple of weekend gaps in Sterling. Cable had just experienced a huge surge thanks to a very bad Non-farm Payroll report but on Saturday a negative poll was released having it open much lower and heading south. News sentiment on GBPUSD had been neutral for a few days so that wasn’t giving us a hand.

However, the situation on EURGBP on the same day was different. It had been on a bullish run for a few days and the gap just helped it along the way with News Sentiment showing bullish confirming the run. When the run hit resistance, News Sentiment shifted dramatically and we were confident selling EURGBP.

Here is another case with USDCAD. Price kept rising until it hit a line of resistance which was a previous line of support. By the time this double top had formed, News Sentiment had turned to bearish and we were confident going short. The gap was filled and more.

So to summarise:

1. Does Price fill All Gaps?
2. Probably: as long as you pay attention to support and resistance
3. and you use shifts in news sentiment to confirm your entry