Did you know that the Forex market is operational 24 /7 a week? Have you ever wondered why you keep seeing gaps between the close of Friday’s evening candle stick and open of Sunday’s night candle stick? Well this was caused by foreign exchange transactions between central banks and heavy financial institutions over the weekend.
Most retail traders think that the currency market (FOREX) is closed during the weekend, but this is not true. It is only closed to retails traders, but it is always open for the central banks and the related organizations. Currency transactions are always done electronically and can not be stopped even for one second. When the market is open and buying and selling are ongoing, then the price also goes up and down, because the price changes based on the supply and demand, and when there is supply and demand, the price changes also.
However the fact that currency movements stops on your MT 4 platform on Friday nights’ doesn’t mean the market is closed globally.On a normal trading day, we can rarely see a gap during the FOREX market open time, unless a too strong price movement happens due to a high impact fundamental news release, otherwise we don’t see a gap between two candles close and open price. However, gaps are also very common in Forex market to form, when the market is closed during the weekend which is a reason why some brokers adjust their trading leverage few hours before the market closes on Friday night.
This is a reason why it is always advised to close out all open positions on Friday nights because a profitable floating trade could end up in loss due to a gap opening against the previous direction the market was trading from the previous week’s close. Most times when this happens brokers fail to honor stop losses of traders and this might result into a huge loss in traders accounts. However on the contrary, traders have developed a profitable trading system based on gap trading after several observations from the FOREX market when gap scenarios occur.
This trading system is not a holy grail as such doesn’t exist in the FOREX world, however when combined with sound money management and reasonable risk to reward, then it could be profitable strategy on the long run. If you are observant, you will notice the price always fills the gap”. It means if the price opens with a gap down, it will go up to cover or fill the gap between the Friday night and the Sunday night price. If it opens with a gap up, then it will go down to fill the gap. As i said earlier, it doesn’t mean it will always work perfectly like this, nothing is perfect in the FOREX market except the trader’s psychology.
Below is a recent market scenario which shows how the EUR/USD currency pair opened with a 150 pips gap down over the weekend. However price fills the gap and even higher before the end of the trading day’s session.
In a year we will have several currency pairs opening with gaps and we could take advantage of this weekend gaps by trading the filling of such gaps. I hope you find this article useful on gap trading and hope it increases your trading profitability in the FOREX market.