Veteran traders know from experience that the key
to winning in the Forex market, or for any other market, for that matter, is
recognizing profitable opportunities before they are about to happen. Over
time, they develop an historical database of patterns and shapes that signal a
high probability trade, one greater than 60%, is setting up. They may use
technical indicators, Fibonacci ratios, or support and resistance levels to
confirm their intuitive judgment, but the eye must first behold the visual “bellwether”. An opening “gap” in a market is often a
free gift, so to speak, and a special situation to follow for gain.
All financial markets have an open and a close, the
latter necessary for traders to catch their breath and for off-line accounting
to take place. Of all the markets, however, the Forex market is the one that
gets the least sleep of them all, opening on Sunday afternoon in Asia and
closing Friday afternoon in New York. When markets are closed, strange things
can happen. Publicity department executives learned long ago to release bad
information on Friday, after markets close, knowing that most of the public
will miss the news. Rumors are often hyped on weekends, too, well before
traders can react.
After a significant weekend event occurs, the
subsequent market open can be bedlam. Traders rush to open or close positions.
A market “gap” in valuations is the
result, a pronounced difference in the previous closing price and the new
opening figure. The “gap” can be attributed to an
overreaction by the market to the event at hand, but the occurrence offers all
traders not one, but two opportunities to leverage for advantage. Here is a
recent example that took place with the “USD/JPY” currency pair:
Over the weekend in question, Larry Summers
withdrew his name from consideration for succeeding Ben Bernanke as chairman of
the U.S. Federal Reserve. The market regarded Mr. Summers as more “hawkish” when it came to using
prolonged qualitative easing policies to stimulate the economy. Other
contenders were considered “dovish”,
meaning that current easing programs would continue, thereby keeping the USD
weaker than expected. Market analysts had already assumed that the Fed would
taper its daily bond purchases in the market in September. A reversal would
require a market reaction.
This fundamental event resulted in the opening “gap” illustrated in the above
chart. From past experiences, veterans can count on the market returning and “filling the gap”, i.e., diffusing the
overreaction in order to reassess the impact of the news. In this case, the “Fill” occurred over the next
two trading days, but, once again, veterans have learned to anticipate that the
market will repeat the behavior that led to the gap in the first place. Trading
this slide in the opposite direction is known as “Fading the Fill”.
Are there other tips that should be taken into
consideration? The size of the gap in this case was roughly 100 pips, sizable,
but not gigantic. The gap size will often define support and resistance for the
next few days, as was the case here. If the gap follows a long prevailing trend
in the same direction, then market sentiment may be formidable in that
direction, and a “fill” may not be in the cards.
You would want to go with the flow under that circumstance. As for the “USD/JPY” pair, it had already
reversed from a few months of strengthening, but the market was uncertain as to
the next move.
Gaps and Fills may come and go, but always remember:
Past behavior is no guarantee of future performance. Good Luck!
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