Foreign exchange markets are open 24 hours and 5 days a week. While markets are closed for the weekend, the world continues spinning and news can break, leading to a gap in the charts when markets reopen. This is quite common when elections are held on Sunday or in case of an “unknown unknown”.
Yet while the gaps can be surprising, they usually follow the same patterns and provide opportunities.
The gap opens and usually closes
Trading commences in Sydney, very early on Monday and when it is deep into Sunday in many places. While liquidity is low, volatility is high.
Is the gap justified? This is the first question to ask if you are online when markets open after the weekend. If the answer is no, based on either technical or fundamental analysis, you may have a trading opportunity. The gap may be an overreaction to the news over the weekend or a move that goes against the long-term technical trend.
The window to act lasts for around 3 to 4 hours before volume and liquidity pick up when Tokyo traders join in. An unjustified Sunday gap has a tendency to gradually close towards the Tokyo open.
Most gaps tend to close. The market reverts to the mean – the closing level that was seen before the weekend. Only then, markets choose a new direction for the currency pair, with more liquidity, more volume, and more news to move it.
And if the gap does not close quickly
A gap that persists through the Tokyo open is already a more meaningful one. It implies that the news over the weekend was significant. If the gap follows the trend, it could carry more weight going forward.
A gap that is not closed in the wake of the European session is even more significant. Trading volume is high during the European session, especially on Monday. If the gap remains open, the pair has a high probability of extending the trend in the direction of the gap.
What do you think about weekend gaps? Do you trade them?
More: What does a successful trader do every morning before the markets open?
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