How to Trade the Forex Weekend Gaps

The US dollar, Japanese yen and British pound: iconic symbols of global trade.

Trading the weekend foreign exchange gap is an easy-to-implement and potentially profitable strategy. The foreign exchange market, sometimes referred to as FOREX, is open 24 hours a day, Monday through Friday, providing a continuous market except on the weekends. A gap occurs in the FOREX market when the opening exchange rate for the new trading week differs significantly from the closing exchange rate achieved during the previous Friday's trading session. Traders profit from this weekend gap by anticipating that the new week's opening exchange rate will trade back toward Friday's closing exchange rate during the trading session.

Things You'll Need

• Risk capital

Instructions

1. 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.

2. 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.

3. 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.

4. 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.

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

Tips & Warnings

• Trading the FOREX market is risky. Trade only with risk capital. Risk capital is the amount of money that, if you were to lose it as a result of your trading, would not result in severe financial hardship.

References

• Trading Gaps in the Forex: Not Trendy, But Very Profitable!