Market Open With a Gap? 3+1 Tips to Quickly Cash In!

Video Transcript:

Hello everyone, it’s Dale here, and today I’d like to show you how to trade when the market opens with a gap. I’ll focus mostly on Forex and indexes, where opening gaps are not too common compared to, for example, stocks. However, if you see an opening gap in Forex or on indexes, it represents a very nice trading opportunity. In this video, I’ll show you how to trade these gaps effectively.

An opening gap usually forms when significant news occurs over the weekend. If you look at the chart, you’ll see Friday’s closing price, followed by the weekend, during which significant news happens. Then, on Monday, the market opens here, and the opening gap is caused by the news. This is how an opening gap looks.

The way to trade gaps is straightforward. First, you need a gap; that’s the initial requirement. Second, you need to see heavy volumes in the zone before the gap. For example, let me use my flexible volume profile here. These are the heavy volumes that occurred before the gap.

What you want to do is mark the beginning of the heavy volume zone on your chart. In this case, it would be this line, which represents a support level. Then, you wait for a pullback. When the price hits this support—the beginning of that heavy volume zone—you go long. This is a long trade scenario for trading gaps. Very simple, isn’t it?

Now, let me show you a short trade scenario. It’s the same concept, only reversed. Here’s an example with the USD/CAD. This is the opening gap, and here are the heavy volumes before the gap. This line marks the beginning of the heavy volume zone, which represents a resistance level. You wait for the pullback, wait until the gap gets closed and the heavy volumes are hit, and then you go short. That’s the short trade scenario.

Let me show you a couple more examples. Here’s the AUD/USD. This is a recent opening gap. Before that, there were these heavy volumes. It doesn’t really matter whether you look at the entire Friday session or just the rotation before the close of the day. In both cases, the volume profile will show you the heavy volumes. Mark the beginning of the heavy volume zone and the start of the gap. This represents a support level. The price makes a pullback, hits that support, and you go long from there.

Another example is the USD/JPY. The recent gap is here. This is a short trade scenario. Use the volume profile, and it will point you to the heavy volume zone. The beginning of this heavy volume zone marks the resistance level. You wait for the pullback and go short from there.

One more example: the NQ. This small gap appeared on Monday. Using the volume profile, you can identify the heavy volume zone. You trade from the beginning of that heavy volume zone. Initially, the price overshot the level a bit, but then there was a nice reaction.

Let’s move on to Tip #2, which is a warning about speculating on closing gaps immediately after the market opens. You might have heard that gaps tend to get closed, and this is true. However, gaps don’t always close immediately. The market might make a move in the opposite direction before finally closing the gap.

If you jump in and speculate on a gap closing immediately after it forms, your chances are no better than flipping a coin—it’s 50/50. Markets do tend to close gaps, but not right away.

In our live trading room on Monday, I received a great question: “How soon do gaps get closed?” While I don’t have exact statistics, in my experience, most gaps get closed on the first day, and the rest within the week. Let’s quickly go through some examples to see how this works.

On the EUR/USD, the gap has not been closed yet. On the AUD/USD, the gap closed. On the USD/CAD, the gap closed on Monday. On the USD/JPY, the gap also closed on Monday. On the USD/CHF, the gap remains open as of Tuesday. On the GBP/USD, the gap closed on Tuesday. On the ES, the gap closed on Monday, and the NQ gap also closed on Monday.

Out of eight markets, six gaps were closed very quickly, most on Monday. While this is not a large sample size, it demonstrates that gaps tend to close soon after they form.

Let’s discuss Tip #3. If there’s a gap, don’t enter trades in the direction of the gap until the gap is fully closed. For example, if there’s a bullish gap, avoid entering long positions until the gap is closed. Gaps act like magnets, and the price is likely to return and close the gap. Entering long positions with an unclosed gap below puts the odds against you.

The same principle applies to bearish gaps. If there’s a gap above your trade, avoid entering short positions until the gap is closed.

As a bonus, consider gaps when planning your take profit. For example, if you enter a long trade and there’s an unclosed gap above, it’s wise to place your take profit at the gap level. You can take partial profits here and let the rest of the trade run.

Similarly, for a short trade, plan your take profit at the gap level below. This ensures you’re trading with the odds in your favor, as gaps are likely to get closed sooner rather than later.

I hope you found this video helpful. If you’re interested in learning more about Volume Profile trading, check out my self-study courses and custom-made indicators on my website. Currently, I’m running a special Black Friday sale where you can get my Volume Profile and Order Flow packs at a discounted price. These packs include video courses, custom software, and free tech support to help you get started quickly.

Thanks for watching, and I’ll see you in the next video. Until then, happy trading!