Closing the gap" trading strategy

Closing the gap" trading strategy utilizes one of the most problematic market phenomena for traders - weekly gap between the closing price of last Friday and the opening price of the following Monday. The gap itself appears due to the fact that the interbank foreign exchange market continues to operate over the weekend, opening on Monday at the price with the highest level of liquidity.

Close the gap strategy is based on the assumption that gap - is the result of speculation and excessive volatility, and therefore a position opened in the opposite direction is highly likely to become profitable within a few days.

This strategy is regular, with clear set rules that even a beginner can understand. This is one of the strategies in which it is not recommended to use StopLossBecause the weekly movement has to be fully covered. However, this also brings some inconveniences: you will have to open positions at the very beginning of the week and close them exactly before the end of the weekly session.

Rules of the "Close the gap" trading strategy

1. Select a currency pair relatively high volatility. I recommend GBP/JPY as it showed the best results during the test. But other pairs with JPY (Japanese yen) should work as well. By the way, this strategy can be used on all major currency pairs simultaneously.

2. When a new week starts, look to see if there is a gap. The gap should be at least five times more average spread for this currency pair. Otherwise, it cannot be considered a real signal.

3. If Monday's opening is lower than Friday's closing, then gap is negativeand you should open a long position.

4. If Monday's opening is higher than Friday's closing, then gap is positiveand you should open a short position.

5. Do not set a stop loss or take profit (why? See above text).

6. Right before the end of the weekly trading session (e.g. 5 minutes before the close of the session), you must close the position.

Example of "Close the gap" strategy operation

You can see 7 weeks of trading on the GBP/JPY pair (as of May 24, 2010), and all of them have gaps. 6 out of 7 gaps give correct signals that bring profit. The last gap gives a wrong signal and brings a small loss. The average spread on GBP/JPY was 3 pips during the period shown in the image and all the gaps were much wider than 15 pips, which means they are normal signals. The final profit was 1612 pips during the 7 weeks.