Brad Alexander
FX Large Limited
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
While we may offer market commentary based on fundamental or technical analysis, we do not offer trading advice and cannot be held liable for any decisions taken by viewers and readers of our material.
Editors’ Picks
EUR/USD trims gains, hovers around 1.1900 post-US data
EUR/USD trades slightly on the back foot around the 1.1900 region in a context dominated by the resurgence of some buying interest around the US Dollar on turnaround Tuesday. Looking at the US docket, Retail Sales disappointed expectations in December, while the ADP 4-Week Average came in at 6.5K.
GBP/USD comes under pressure near 1.3680
The better tone in the Greenback hurts the risk-linked complex on Tuesday, prompting GBP/USD to set aside two consecutive days of gains and trade slightly on the defensive below the 1.3700 mark. Investors, in the meantime, keep their attention on key UK data due later in the week.
USD/JPY drops toward 155.00 as focus shifts to US data
USD/JPY meets fresh supply and inches closer toward 155.00 in the Asian session on Tuesday. The Japanese Yen holds the upper hand over the US Dollar after Japanese Prime Minister Sanae Takaichi led the ruling Liberal Democratic Party to a historic landslide win and on intervention talks. Traders brace for key US economic data that could offer more clues on the Federal Reserve's monetary policy.
Editors’ Picks
EUR/USD trims gains, hovers around 1.1900 post-US data
EUR/USD trades slightly on the back foot around the 1.1900 region in a context dominated by the resurgence of some buying interest around the US Dollar on turnaround Tuesday. Looking at the US docket, Retail Sales disappointed expectations in December, while the ADP 4-Week Average came in at 6.5K.
GBP/USD comes under pressure near 1.3680
The better tone in the Greenback hurts the risk-linked complex on Tuesday, prompting GBP/USD to set aside two consecutive days of gains and trade slightly on the defensive below the 1.3700 mark. Investors, in the meantime, keep their attention on key UK data due later in the week.
Gold loses some traction, still above $5,000
Gold faces some selling pressure on Tuesday, surrendering part of its recent two-day advance although managing to keep the trade above the $5,000 mark per troy ounce. The daily pullback in the precious metal comes in response to the modest rebound in the US Dollar, while declining US Treasury yields across the curve seem to limit the downside.
Bitcoin Cash trades lower, risks dead-cat bounce amid bearish signals
Bitcoin Cash trades in the red below $522 at the time of writing on Tuesday, after multiple rejections at key resistance. BCH’s derivatives and on-chain indicators point to growing bearish sentiment and raise the risk of a dead-cat bounce toward lower support levels.
Dollar drops and stocks rally: The week of reckoning for US economic data
Following a sizeable move lower in US technology Stocks last week, we have witnessed a meaningful recovery unfold. The USD Index is in a concerning position; the monthly price continues to hold the south channel support.
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