Quite often, over the weekend from Friday’s close to Monday’s open, there is a Gap in the market. Sometimes this can be quite small, but there are times when this gap can be significant.
So what is a Gap? A gap is indicated by the empty space between 2 candlesticks or bars on a chart, this gap occurs when there is a difference in the previous close to the current open. Such gaps can be seen regularly in the Equities market because Stock Exchanges open and close at specific times. When a Stock Exchange closes there can be company information that is published that can affect the value of a specific stock. Therefore, when the Stock Exchange re-opens a stock’s value will be significantly different from the previous close – thus you will see a gap.
We all know that the FX Market is open 24 hours a day and 5 days a week – but that is true of the retail FX market. Most brokers will conduct necessary routine maintenance on their servers over the weekend but the wholesale market is still open – albeit with limited liquidity.
Retail markets typically close by 00:00 GMT – but the market never closes. Whilst the majority of the world enjoys the weekend break there are markets, such as in the Middle East, where it is a “normal” trading day on Saturday. Banks and financial institutions in the middle east are still trading in a somewhat illiquid market. During this time the “price makers” are those institutions open in the Middle East so the appetite to take on risk is less as they have no way to mitigate their risk, unless they do so with another Middle East institution. If there is “significant” interest, then these orders become like “hot potatoes” where they are passed on to anyone that will take them! And the market can spiral up or down. There can also be geo-political events that occur over the weekend that can significantly move markets.
As we enter Sunday we gradually get more participants in the Market, firstly from New Zealand and then Australia. But these are still “relatively small” financial markets and markets remain somewhat illiquid until the Asian Financial Time Zone starts to trade and add liquidity back into the market. So we now have a “deeper” market just as most Retail Brokers turn their services “online” for their retail clients late on a Sunday evening.
But if the weekend market has experienced a “hot potato scenario” – or a “major geo-political event” then markets will, naturally, experience a Gap.
So how can you avoid the “gaps” – quite simple, don’t carry a position over the weekend! Not only are you risking a potential gap but you are also “paying” for the privilege of holding a position over the weekend. All brokers will “charge” you a swap (or holding cost) fee, this varies from broker to broker but, I can assure you, all brokers have this “fee”. If your strategy “insists” you hold your position over the weekend, make sure you use all the tools your broker offers to “manage risk” and/or make certain your broker ensures you will never owe them if your equity goes into negative.
#tradesafely #fxzoo #doublehit