The Forex Gap Strategy

The Forex Gap Strategy is an interesting trading system that utilizes one of the most disturbing phenomenon of the Forex market — a weekly gap between the last Friday's close price and the current Monday's open price. The gap itself takes its origin in the fact that the interbank currency market continues to react on the fundamental news during the weekend, opening on Monday at the level with the most liquidity.

This strategy is based on the assumption that the gap is a result of speculations and excess volatility, thus a position in the opposite direction should probably become profitable after a few days.

Here is how it works:

1. Select a currency pair with a relatively high level of volatility. I recommend GBP/JPY as it showed the best results during my tests. But other JPY-based pairs should work too. By the way, it's a good strategy to use on all major currency pairs at the same time.
   
2. When a new week starts look if there is a gap. A gap should be at least 5 times the average spread for the pair. Otherwise it can't be considered a real signal.
   
3. If Monday's (or late Sunday's if you trade from North or South America) open is below the Friday's (or early Saturday's if you trade from Oceania or Eastern Asia) close, the gap is negative and you should open a Long position.
   
4. If Monday's open is above the Friday's close, the gap is positive and you should open a Short position.
   
5. Don't set a stop-loss or a take-profit level (it's a rare occasion but a stop-loss isn't recommended in this strategy).
   
6. Immediately before the end of the weekly trading session (e.g. 5 minutes before close) you need to close the position.

The GBP/JPY chart below shows the last 7 weeks (as of May 24, 2010) and all of them have gaps. 6 out of 7 gaps gave correct signals that result in a lot of profits. The last gap gave a wrong signal and yields a medium loss. The average spread for GBP/JPY was 3 pips during this period and all gaps were much wider than 15 pips, making them all qualifying signals. The net total profit was 1,612 pips in 7 weeks, which is not bad at all!

Before using this strategy on a live account, make sure to try it out on demo first.