Some of you may remember my blog post from last week called “Cable – Closing the gap”. If you haven’t read it then click here to do so, but in short it was a post-trade break down explaining why and how I traded the gap that occured upon the opening of the weekly FX markets. Well, it happened again and I am again going to show you why and how I took this trade again, 7 days after my last successful gap trade.
I won’t go in to detail on why gaps occur in the markets because you can learn this in the previous gap trading blog post. As I explained, gaps most commonly appear over the weekend on the FX currency markets because a lot can happen in the 2 days that the markets are closed. There is normally always a variance in price (even if it is only 1 or 2 pips) between the Friday close price and the Sunday evening opening price.
Let’s look at the chart set up for this 2nd gap trade on the same FX currency pair which is the GBP/USD pair. Otherwise known as Cable.
I have listed the main analysis on the chart above but the main thing you will notice is that the gap is the opposite to last weeks. Price gapped down upon open rather than gapped up which is why this trade probably wasn’t taken by many other traders. It is technically trading against the trend of the current timeframe. Nether the less, it still ticks all other boxes for a high probability market gap trade.
As always, I tend to place a reasonably tight stop loss when trading gaps because I have found from my own backtesting and experience that if it is going to work, it will work almost right away. My stop loss was placed 30 pips below the market open price and this gives the trade an initial Reward:Risk ratio of over 1.5 : 1 if the trade is closed when the gap is fulfilled. I actually have a larger target profit in mind for this trade because of the higher timeframe (daily & 4hr) trend analysis.
You will notice price is in the region of the larger 0.618 Fibonacci Retracement level and also the daily bullish trendline. Therefore, there was a good probability of price going higher than the Friday market close and creating a new lower low up near the 1.31 resistance zone.
With this in mind, the gap down essentially just provides a discount on entering the longer term trade. A discount of 46 pips with there ability to have a smaller stop loss of only 30 pips. This boosts R:R and therefore your profitability.
Let’s look at how the trade played out throughout Sunday evening/Monday morning.
Price struggled to break below the daily S1 support level as expected and, after a small amount of choppiness, it went to our larger target of 1.31 to produce a very nice R:R of 4.4 : 1.
There is a high chance that this trade will climb further but I am a fan of keeping greed out of my trading habits. Price fulfilled the weekend gap and climbed to retest a previous support/resistance zone that has shown a lot of action recently. It is wise to take profit at these areas.
We also have the “final” Brexit votes this week which may cause GBP to act erratically and also, this trade is against the current timeframe trend. There is a high chance that the 1.31 level will hold strong and price will retrace back down towards the original entry.
You can track this trade on the Trading View platform by clicking the following link: https://uk.tradingview.com/chart/GBPUSD/DKYaZbNV-GBPUSD-Long-Gap-Trade/
Have a great trading week everyone!