Trading Market-Open Gaps In High Volatility

Markets are generally known to be overreacting. I saw this happen so many times and the last time I saw this was just yesterday.

Market open like this hasn’t happened for quite a long time. There were market gaps everywhere and volatility got really high.

Why did the market open this way? Funny thing is that nobody really knows. Sure, there is the coronavirus outbreak but nothing really unexpected happened during the weekend so why the gap and crazy volatility?

There was also the big news concerning the oil. I was talking about this in my yesterday’s video here:

Weekly Trading Ideas 9.3.2020 (Oil Special)

However, the oil news is not really the kind of news to cause such panic.

So, in my opinion markets are overreacting and I think it will all get back to normal again.

The market open on Monday created many nice gaps. There is still a lot of them which have not been filled yet.

As I showed you in one of my previous articles – gaps tend to get filled. If there is a significant Volume Cluster created before a gap then it usually works as a strong support/resistance.

More about the basics of this strategy here:

Gap trading strategy

Let me now show you some of the current gaps and do a small comment on each one of them.

EUR/JPY gap

Forex pairs which include the JPY were hit the hardest, created the biggest gaps and had the biggest volatility increase.

Even though the EUR/JPY made a 280 pip downwards move in one day it recovered quickly and just today it closed the opening gap.

As you can see in the picture below, there was a significant Volume Cluster created before the gap. The price reacted to it nicely and made a selling reaction. This is exactly how the “market open gap” setup is supposed to look like.

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USD/CHF gap

Another gap occurred on a less volatile forex pair – the USD/CHF. the gap was around 50 pips wide and it got closed today.

In here the price closed the gap but did not made it to the heaviest volume peak which I marked in the picture below.

This left the resistance “tested”. In a case like this I don’t want to trade shorts from such resistance anymore because I consider it spent (even though the price did not really hit it). The reason is that the price turned very close to it and made a significant reaction.

It is a shame as it would have been a nice short trade.

CAD/JPY gap

Now this is a different story! There was a 160 pip opening gap on the CAD/JPY! The price haven’t even get close to closing it. The volatility is pretty big here. This means the gap could get filled shortly. I would not be surprised if it got filled today or tomorrow.

It does not matter too much when it will get closed though. The thing which I find interesting here is the heavy Volume Cluster which got created before the gap (Volume Cluster with the heaviest volumes at 78.51).

According to the gap trading strategy this Volume Cluster should work as a strong resistance and when the price closes the gap and hits it, then it should react to it and go downwards again.

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AUD/JPY gap

AUD/JPY made a 100 pip gap and then went into a crazy selloff. It made a 500 pip downwards movement.

Now this crazy movement has been negated and the buyers are pushing the price upwards again.

Still, the price has not gone into the opening gap area yet . This means that the setup we are looking for is still viable to trade.

There is a nice Volume Cluster with volume peak at 69.84. When the gap gets closed and price hits this area then it should work as a strong resistance.

Adjusting to a bigger volatility

When the volatility rises to such extent like now then it is necessary to adjust to such market conditions. If you were used to trading with 10 pip Stop Loss then now when the volatility rose you should widen your SL (and TP).

In most of the cases I like to stick to my fixed Stop Loss and Take Profit pip values but when volatility changes as drastically as now then I adjust it. At least for a few days until all gets back to normal again.

I hope you guys liked this article. Let me know what you think in the comments below! And remember to trade carefully especially in conditions like these.

Happy trading!

-Dale

Gap Trading Setup – Examples

In yesterday’s post, I was talking about an opening gap that got created on JPY pairs. I also showed you a trading strategy that you can use in a situation like this.

If you missed it or if you would like to read the exact rules of the strategy again, then the yesterday’s post is here:

EXPLAINED: Gap Trading Setup

Different trading instruments

I got quite a lot of emails yesterday and many of you guys were asking, whether this strategy was also applicable to other trading instruments.

The good news is that the answer is – yes! You can apply this strategy to other trading instruments as well.

Apart from forex, you can also use this one for example on indices like S&P 500, energy like Crude Oil, metals like Gold and other…

I am not that sure about single stocks though. The thing with stocks is that opening gaps are quite normal there. It is not so rare as for example on forex. Those gaps also don’t get filled that often. So I personally don’t trade this strategy on stocks.

Where this strategy really shines, is instruments where initial gaps are not very common.

Examples

Let me now show you a few more examples on different trading instruments than forex (if you are interested in forex, then you can check out yesterday’s post, which was just about forex)

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EXAMPLE #1: Crude Oil

In this example, there is an opening gap from this Monday (27th January). The gap was a smaller one and it was followed by a quick movement down. This movement was a low liquidity move. Very low liquidity – almost a gap!

The gap was there for two whole days and then it got completely filled.

Above the gap, there was a heavy volume cluster (heavy volumes). This volume cluster works as a resistance.

As you can see from the picture below, the price reacted to it, and went downwards.

The chart below is CL 03-20; 30 Minute Time Frame:

EXAMPLE #2: ES (S&P 500 futures)

In this case, the opening gap was quite a big one. It formed on market open on the 27th January and got completely filled after two days.

The resistance which we use for trade entry was a bit higher though. It did not get hit for almost another whole day. Then the price very shyly touched it and sell-off started.

BTW what you see in the picture is not the whole selloff. It is just the start! Currently the price is 25 points lower than what you see there.

The chart below is ES 03-20; 30 Minute Time Frame

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EXAMPLE #3: Gold

The opening gap on Gold occurred at the same day as in the previous cases (27th January) and it was a pretty big one!

Also, the volumes which got accumulated below the gap on Friday, were pretty massive! Nothing a Volume Profile trader should miss!

On Monday, the gap got filled only partially, but not fully. The support was still there and ready to get tested.

On Tuesday, the price hit the Volume Cluster, and as soon as it touched it, the price shot upwards in a quick move creating a Pin bar (on 30 Minute Time Frame).

The chart below is XAUUSD (Gold); 30 Minute Time Frame. *The picture is from Mt4 platform because I had some issues with data for Gold in NT8):

As you can see, this strategy works pretty nicely on many trading instruments, not only forex.

It is not the main strategy which I trade (it is a bit rare to see a valid entry setup). But when I see it, I trade it!

I hope you guys like it!

Happy trading!

-Dale

EXPLAINED: Gap Trading Setup

In a Weekly Ideas video, which I posted here on Monday, I was talking about gaps that got created on the market open on Monday.

In this post, I would like to follow up on this video and talk more about the gaps and most importantly about one cool trading setup!

Unlike for some other trading instruments (for example stocks) gaps are pretty rare on forex. Forex runs 24/5 so, the only time they can occur is when the market opens on Monday.

Gaps Tend to Get Filled

On forex, gaps tend to get filled. If there is a small gap and no major news that would have caused it, then the gap gets usually filled pretty soon (in a matter of hours).

If it is news-related and the gap is bigger, then it can stay not filled longer. Usually, max a few days. Then in most cases, the gap gets filled.

Gap Trading Setup – Explained

There is a nice trading setup you can trade when there is an opening gap.

If there are heavy volumes created before the gap, then the heavy volume area will work as a strong Support/Resistance.

What you want to see is this:

1. Opening gap

2. Heavy volumes before the gap

3. Price fills the gap and then hits the heavy volume area – which is the Support/Resistance. You enter your trade from there

Examples

In the Weekly Trading ideas video and also in my member’s area (members of Dale’s Trading course), I published some trading levels based on the opening gap which occurred on JPY forex pairs.

Let’s now have a look at few examples I published there and let’s see how price already reacted to some of them.

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USD/JPY Gap Example

Let’s start with USD/JPY.

There was an opening gap and it got fully filled in today’s asian session. There was a nice Volume cluster created before the gap on Friday (marked in blue rectangle).

So, gap got closed, price hit heavy volumes, filled my short pending order and went quickly downwards. A perfect trade!

The chart below is USD/JPY; 30 Minute Time frame.

CHF/JPY Gap Example

Another trade based on this setup was on CHF/JPY.

The scenario was the same as in the previous case. There was an opening gap and heavy volumes got created before it.

Those volumes were a strong Resistance. The gap completely closed on Monday and then the price reacted to the heavy volumes.

Another nice profit! BTW I published this trading level in the Weekly trading ideas video in advance on Monday. You can watch the video here:

Trading the Opening Gap on JPY Forex Pairs – Weekly Trading Ideas

The chart below is CHF/JPY; 30 Minute Time frame.

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CAD/JPY Gap Example

Now, there are still some JPY pairs, that haven’t closed the gap yet! Let’s first have a look at the CAD/JPY.

This pair closed the gap only partly. The way I look at it, is that the gap still is not properly closed and therefore I consider it a standard gap, which will need to get closed eventually.

In the picture I divided the gap into two parts. The first – green part already got filled. The red part is still not filled.

The resistance based on the heavy volumes before the gap is a little bit above the gap.

What I expect is that the price will eventually fully close the gap (the red area) and then react to the resistance I marked in blue.

The chart below is CAD/JPY; 30 Minute Time frame.

AUD/JPY – What if the gap does not get filled?

The last example is on the AUD/JPY.

In here, the gap did not get filled at all. It has already been two and a half days and still nothing!

I still expect this gap to get closed soon. My guess is that it will be filled until this week ends.

If it does not get filled and if it stays this way, then the market could go into a downtrend.

This is actually another phenomenon I wanted to show you!

If there is a gap which is not filled, then it means that one side of the market (buyers or sellers) is clearly much stronger than the other and they will push the price one way only – away from the gap.

In other words – market participants don’t even have the strength to push the price towards the gap to close it.

This in many cases starts a strong trend.

AUD/JPY Example

If the gap in the picture below does not get closed within the next couple of days, then it is likely that it will not get closed at all and a strong downtrend will start.

The chart below is AUD/JPY; 30 Minute Time frame.

I hope you guys found this useful! Feel free to let me know what you think in the comments below!

 

Happy trading!

-Dale

Trading the Opening Gap on JPY Forex Pairs – Weekly Trading Ideas 27.1.2020

*Disclaimer: Presented opinions, trades and trading ideas on the markets and charts is not advice nor a trading recommendation. It is general information and it is for educational purposes only.

**You can learn more about my trading setups in my new book: VOLUME PROFILE: The insider’s guide to trading

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