Trading on gaps, like any other trade, during the abnormal functioning of the market carries tangible risks, therefore it is highly discouraged for novice traders . First of all, before entering the front line, you need good preparation, both technical and moral, so that at the most crucial moment you do not forget to follow your own rules.
Binary options truly open the door to Narnia – a world of hard-coded risks and entirely new trading opportunities. You don’t need to worry about unexpected losses or patiently wait for the accumulation of profits on the position. With the help of options, already forgotten trading strategies gain a second wind, reviving the ability to continue to make a profit. In this article, we will look at the gaps trading method and its potential in the world of binary contracts trading. Before moving on to trading binary options on gaps, let’s first define what gaps are and why they occur.
Gaps for dummies
A gap is an abnormal gap in quotes when the difference between the opening of a new period and the closing of the previous one is an order of magnitude larger than usual. There is no clear definition of a gap and, in fact, any significant gap in quotes can be attributed to a gap. We are interested in the significant gaps, that is, those that can be traded.
Gaps arise for a variety of reasons, up to primitive technical ones. Most often, on the exchange, gaps occur in the intervals between trading sessions . In the case of forex , gaps often occur at the Monday opening. Alternatively, in the stock market, the reason may be a company that unexpectedly filed for bankruptcy on the first day of the weekend: traders begin to actively rearrange orders, and the Monday opening price may be significantly lower than the Friday session closing price.
The most common cause of gaps in Forex is accumulated orders over the weekend. During the time when the market is not active (namely, on the weekend), the demand for the currency increases greatly, and therefore a certain number of buy and sell orders accumulates. At the market opening from Sunday to Monday, these same orders begin to be executed and a gap is formed on the chart, a gap between the last quote on Friday and the first Monday.
That is, over the weekend, the demand for the currency increased greatly, and when these orders were triggered at the market opening, a gap was formed.
Roughly speaking, gaps arise from changes in market sentiment caused by some fundamental factors. This can be either an unexpected event in the financial markets, or natural disasters, political pressure, the threat of acts of terrorism, or a new plan to save the economy from Mario Draghi.
While this happens much more frequently in practice, the gap does not have to occur on weekends or overnight. Gaps can also occur on shorter time frames . Due to the fact that the consistency of the flow of quotations strongly depends on the presence or absence of liquidity, the lack of such liquidity can also lead to significant fluctuations in quotations.
Gaps always close (almost)
An important feature of gaps is their unkillable desire to close the hole formed. Such behavior of market players is as natural as a rebound from a round level or price movement in a channel. Actually, the price movement after a gap is somewhat reminiscent of a wave that washes away pending orders, players who have not yet realized their loss. As a result, the instrument displays a natural pullback on the chart until it finds a balance at the “fair price”.
- Despite the fact that in most cases gaps tend to close, there are still situations when the movement after the gap continues in the same direction. Typically, this occurs when a gap is preceded by a long trend movement backed by strong fundamentals.
Assets for trading
Gaps in Forex are quite rare. The most significant gaps occur at the open of the week, from the opening of the first trading session on Monday, when a sufficient number of buy and sell orders accumulate over the weekend. Also, the emergence of gaps is often associated with the release of important economic events and fundamental forecasts.
Thus, gaps in currencies should be traded either before the release of important news, or at the opening of Monday. Here you should pay attention to the choice of a pair suitable for trading. Best of all: EURUSD, GBPUSD, EURJPY, GBPJPY. Gaps for these instruments are closed in about 70% of cases.
At the same time, gaps in quotations when trading stocks are quite a trivial phenomenon. Gaps can occur during a trading session, when traders do not provide sufficient liquidity, and at the opening of a new session, in fact, when the largest gaps occur. Also, an obvious advantage of stocks is a large selection of analysis tools, although most brokers offer only a couple of dozen of the most popular.
Trading gaps in binary options is much easier than in any other market. You do not need to know in advance how far the price will travel, which means that it is not at all necessary for the gap to close completely. The opposite situation, when the price moves away from the gap, also makes it possible to feel the advantage of options – no matter how much the price passes, the outcome of the transaction is predetermined in advance.
2 types of options are best suited for trading gaps, traditional (classic binary options) and touch. The rules are simple: when a gap is formed, wait for about 30 minutes, then enter the market in the direction of the gap. In this case, the size of the gap should be at least 20 points. We choose the expiration time for Forex instruments around 5-8 hours. We set the expiration time for shares at the end of the trading session, also within 8 hours. The exact expiration time can be determined experimentally.
As you can see, immediately after the formation of a gap in GBPUSD, the price moves in the indicated direction for some time, but after a couple of hours it reverses and begins to move towards a gap, simultaneously testing the resistance level .
There are also absolutely ideal situations when an unjustifiably cheapened instrument systematically regains its position.
There are many more trading opportunities in stocks, but at the same time, gaps are closed less often. Because of this, the number of unsuccessful deals is growing, which to some extent is compensated by their number. In fact, there are really many opportunities in the stock market, so by doing your own research, you can probably find the right tool.
When choosing a broker, pay attention to the opening time on Monday and the list of instruments available for trading. The earlier trading starts, the better. The described trading method shows the obvious advantages of working with binaries – the burden of responsibility for subtle technical analysis immediately flies off the trader’s shoulders in order to become like the rough and natural urges of the market. But not all brokers allow you to use its full potential.