Recent weeks have opened with significant Sunday / weekend gaps in quite a few currencies, with EUR/USD standing out in a sharp move.
Trading in the early hours of the week isn’t for everyone. For many people, it just collides with their personal life – it is Sunday night in Europe and Sunday afternoon in the US. Do you trade these gaps? Here are a few things to watch out for.
Betting on the open? Think again
Do you leave open positions over the weekend, hoping that the events over the weekend will move in your direction? This might be dangerous. With the current debt crisis in Europe, but also with other global matters (such as the S&P downgrade), too much is happening during the weekend. Do you really want to follow the news very eagerly during the weekend? Isn’t resting better?
You might be very pleased to see the markets open in your favor and even see your position hit the Take Profit point. But if it goes in the other direction, you’re wiped out instantly, without a chance to recalculate.
Trading after the Market Opens
- Gap created: Early trade starts at 20:00 GMT, in the South Pacific. The initial gap is created in Sydney and Wellington. Contrary to most other sessions in this zone, this one is very active and consists of significant and healthy moves, especially if there is a gap.
- Digest and react within 4 hours – While this session is relatively active, the more serious action begins only when Tokyo opens, at 00:00 on Monday. In many cases, these gaps tend to close before traders in Tokyo join in.
- Gap closed scenario: So, if according to your analysis (technical, fundamental, both) the gap is unjustified, these four hours are a good time to act in the direction of a close in the gap.
- Gap move extended: But if your analysis points to a justified gap, there’s a good chance that the pair will just get further away from the close on Friday, extending the movement.
- Gap trade ends: When traders in Europe join in, liquidity is already much higher, and more news and analysis float around. The Sunday gap should end by this time.
Do you trade these gaps? If so, how do you do it?
Further reading: 5 Most Predictable Currency PairsGet the 5 most predictable currency pairs