Simit Patel

Lots of gaps in the forex market over the new year holiday, presumably in part due to the "fiscal cliff" resolution in the US. Here are some charts to illustrate. Be sure to check out our video on gaps and the section on gaps in DREBG's course for more on trading gaps.

The yen continues to refuse to offer a pullback.



USDCAD is getting hit hard.


While USD and JPY are getting most of the attention, this move is big enough to create some impact in the crosses. Here's GBPNZD:


AUDCHF has a much smaller gap and a less pronounced move, but still beyond its normal activity.

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Simit Patel

USDCAD has found a bullish engulfing at support on the 4 hour chart. for those who want to speculate the gap will be filled, this offers nice reward/risk. however, i consider this more of a pro gap than a novice gap, and so i'm less inclined to favor a trade based on closing that gap.

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Luke Myers

Ya baby !

Made some nice money for the IT fund on that Gap on the SPY. Finally getting the fund back in line after the failed gold trade in October and the FOREX turtle draw downs of November.

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DREBG

Absolutely, Simit!! These are AWESOME trading opportunities...

The one I'm particualrly interested in right at this moment is AUD/USD... A great 1:2.4 R&R to fill the pro gap...


1/3/13 - 10:32a - NYT - AUD/USD - 1H Chart - Pro Gap Trade

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Simit Patel

dave, so you are trading the close of a pro gap now? do you think there is any meaningful difference between pro and novice gaps in terms of when to trade the closure of them?

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DREBG

My take has always been: Gaps close... PERIOD! Now, how LONG it takes is the big question. Often, Pro-Gaps are larger and take longer. But most of all, they will foreshadow a direction change AFTER the Gap fills... meaning, in the AUD/USD chart above, shorting down to the Gap-fill level AND THEN looking for a reversal to get long, are BOTH high probability trades.

I like to put-on small trades so I know I can ride-out a prolonged PA period (within reason), and hold until they close at profit. In fact, Gap trades are the ONLY time I would consider negative R&R (tho not necessary in this case I don't believe).

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THE GREATEST RISK IS NOT TAKING ONE...

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Simit Patel

that makes sense -- thanks for the clarification. i was thinking a closure of the gap might be a great opportunity to trade in the direction of the gap (i.e. buy the dip). a lot of the gaps have closed already, but we still have a few stragglers.....

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StockJock

Yes, gaps are a very interesting trading phenomenon. I look forward to more of your videos and reading DREBG's course.

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StockJock

If you are not using Volume Spread Analysis (VSA), you're just playing Checkers while the Smart Money is playing Chess.
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Luke Myers

When I first traded stocks back in 2008 one of my first strategies was gap trading. I would go only Yahoo stock scanner and do a scan for Largest % gainers on the day. I would see all the top 20 Gaping stocks. I would go long, assuming this was good Risk Reward because there was a good reason that the stocks where strong and Gaping higher. Usually this was on good news like earnings or some kind of patent. I would spend the the first 15 minutes of the day quickly searching for info on why some of these stocks gaped and then pick ones I thought were good to get into. Stocks I thought had more upside. I had poor risk management skills but it was a profitable strategy just lots of work every morning.

I was never in the camp going against gaps trying to play the gap fill. I found that smaller gaps have a higher % of filling soon. Large gaps with large strength do not fill at least not right away. There is a whole trading nitch where people search out gap just to short them and trade the filling of the gap. I think it is a interesting counter trend trading style. I think we are going to try and fill some of these Gaps starting Friday or early next week after the initial mania dampens out. Momentum is already showing clear weakness supporting this view.

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DREBG

I got a couple emails on the AUD/USD Gap chart I posted earlier and the common question was, "So when do you get in?" I didn't mention it this morning but it's no different than "usual"... let me explain...

After such a Gap, simply apply some technical analysis to find an entry. I my case, I used divergence with MACD (pick your Indie- doesn't really matter).

As shown here, there was CLEAR AND STRONG divergence AT RESISTANCE (78.6 Fib level). It doesn't get much better in identifying this setup.
That said, getting in AT ALL in these Gap Trades is often just fine- so just GET IN! LOL!

I went short @ 10:31a, NYT @ 1.0516 and the trade is now sitting @ +55 with 70-90pips to go to close the Gap...

I hope this helps!

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