How to trade the forex weekend gaps




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How to trade the forex weekend gapsHow to Trade the FOREX Weekend Gaps

Trade Forex weekend gaps using this simple strategy.

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Weekend gap trading is a popular strategy with foreign exchange, or Forex, traders. While technically open around the clock, Forex trading closes on Friday afternoon and doesnt reopen until Sunday evening. Many news announcements and world events that affect currency prices can happen between trading sessions. Forex investors trade the weekend gap by expecting Sundays opening price to return to Fridays closing price.

Go online to your Forex trading account or open an account if you do not have one. Pull up the list of currencies and select a heavily traded pair. The euro-U. S. dollar (EUR/USD) is the most popular pair to trade, followed closely by the U. S. dollar-Japanese yen (USD/JPY) and the British pound sterling-U. S. dollar (GPB/USD). Of the three, the EUR/USD is the most liquid and least volatile, making it an excellent currency pair to trade during the weekend gap.

Pull up the closing price for 5 p. m. (EST) Friday for the currency pair you select. Using the USD/JPY pair as an example, say the closing price on Friday at 5 p. m. was 82.00. Log this information in your notebook. You will use this closing price to determine if the gap can be traded when the Tokyo market opens on Sunday at 7 p. m. EST.

Decide how large the gap must be before you will enter a trade. For example, if you want to trade a 1 percent gap in the USD/JPY, you will look for the opening price to gap up around 82.80 (82.00 x 1 percent = .80) or gap down to 81.20. You can adjust the percentage higher or lower to fit your risk tolerance.

Wait for the Tokyo market to open at 7 p. m. Sunday. Enter a trade if the opening USD/JPY rate is at least 82.80 or 81.20. Use Fridays closing price of 82.00 as your profit target. For example, if the market at opening gaps up at 82.80, you would sell the currency pair and look to close the trade when the price hits 82.00; if the market opens at 81.20, you will buy the currency pair and close the trade when the price hits 82.00. Keep the trade open until the gap is filled or if the currency chart indicates the gap will continue to widen.

Things You'll Need

Choose the currency pair you want to trade. Although there are many different currency pairs traded every day, the most actively traded currency pairs traded today are the euro-dollar (symbol EUR/USD), the dollar-yen (symbol USD/JPY) and the pound-dollar (symbol GPB/USD). If you are new to FOREX, you may want to start out trading the euro-dollar pair, as it is the most liquid, and therefore less volatile than other pairs.

Identify the currency pair's closing exchange rate set on Friday. The closing exchange rate for the gap strategy is the closing exchange rate achieved on Friday at 5:00PM EST. For example, if the EUR/USD closed at 1.3800 on Friday at 5:00PM EST you would record this information and compare it to the following week's opening exchange rate, to be set on Sunday evening when the Asian market opens at 7:00PM EST.

Determine the percentage size of the gap. For example, you may want your gap to be greater than or equal to one percent, half a percent, or even a quarter of a percent. Assume you had chosen one percent. In this case you would want to verify if Sunday night's Asia opening exchange rate is off by one percent or more from where the exchange rate closed on Friday at 5:00PM EST.

Initiate a trade if the gap is greater than or equal to your predetermined criteria. For example, if you are using a one-percent gap criterion in the EUR/USD, then you would buy the currency pair if the exchange rate opened the week one percent or more below where it closed on Friday. If the EUR/USD currency pair opened the week one percent or more above where it closed on Friday, you would sell the currency pair.

Close out your trade once the gap has been closed or if the gap continues to widen beyond your initial criterion.