Weekend gap trading is a popular strategy with foreign exchange, or Forex, traders. While technically open around the clock, Forex trading closes on Friday afternoon and doesn’t reopen until Sunday evening. Many news announcements and world events that affect currency prices can happen between trading sessions. Forex investors trade the weekend gap by expecting Sunday’s opening price to return to Friday’s closing price.
Go online to your Forex trading account or open an account if you do not have one. Pull up the list of currencies and select a heavily traded pair. The euro-U.S. dollar (EUR/USD) is the most popular pair to trade, followed closely by the U.S. dollar-Japanese yen (USD/JPY) and the British pound sterling-U.S. dollar (GPB/USD). Of the three, the EUR/USD is the most liquid and least volatile, making it an excellent currency pair to trade during the weekend gap.
Pull up the closing price for 5 p.m. (EST) Friday for the currency pair you select. Using the USD/JPY pair as an example, say the closing price on Friday at 5 p.m. was 82.00. Log this information in your notebook. You will use this closing price to determine if the gap can be traded when the Tokyo market opens on Sunday at 7 p.m. EST.
Decide how large the gap must be before you will enter a trade. For example, if you want to trade a 1 percent gap in the USD/JPY, you will look for the opening price to gap up around 82.80 (82.00 x 1 percent = .80) or gap down to 81.20. You can adjust the percentage higher or lower to fit your risk tolerance.
Wait for the Tokyo market to open at 7 p.m. Sunday. Enter a trade if the opening USD/JPY rate is at least 82.80 or 81.20. Use Friday’s closing price of 82.00 as your profit target. For example, if the market at opening gaps up at 82.80, you would sell the currency pair and look to close the trade when the price hits 82.00; if the market opens at 81.20, you will buy the currency pair and close the trade when the price hits 82.00. Keep the trade open until the gap is filled or if the currency chart indicates the gap will continue to widen.
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