Weekend gaps are very common at trading. Being a Forex trader you might not get the price gaps very frequently since the market is open 24×5. But if you deal with the stop market, you are most likely to get these gaps very frequently. Most of the naïve and intermediate traders don’t even know the importance of the price gap in the market. But the smart traders take advantage of the market gap and execute high-quality trades. In fact, you can automate the process by using a trading bot.
To understand the concept of the gap trading method, you have to understand the different types of gaps formed in the market. There are three major types of gaps used by professional traders.
These are –
- Breakaway gap
- Runaway gap
- Exhaustion gap
Breakaway gaps are formed when the market starts to establish a new trend. For instance, you will notice a bullish price when the market tries to establish a new uptrend. On the contrary, you notice a bearish price gap when the market tries to establish downward momentum.
Runaway gaps are often known as a continuation pattern. Most of the time, price tends to cover up the gap and then starts to move in favor of the established trend. The professional traders love to trade such gaps since the associated risk factors are very low compared to the reversal trading method.
An exhaustion gap is used to trade the major reversal in the market. This is the most complicated type of gap and it becomes really tough to make a profit even with the use of trading bots. However, if your trading bots are familiar with the reliable candlestick pattern, it can manage to execute quality trades even at the exhaustion gap.
Trading the gaps with the bots
The majority of the traders prefer to use the bot when it comes to gap trading strategy. Monitoring the price movement right at the opening of the market is a very tough task. Even if you manage to do so, chances are very high that you will hardly find any gap in each week. Unless you trade multiple assets, you might not be able to find any gap. This is where the term bots into actions.
Your bots need to deal with four important parameters to find the perfect trade setups in the asset.
These are –
- Analyzing multiple assets
- Analyzing the type of gap
- Analyzing the risk factors
- Execution of the trade
Analyzing multiple assets
We have already said finding gaps in the Forex major is a very difficult task. But if you program the bot to analyze 10 different assets in each day, chances are very high you will find at least one gap in each week. The functions should be designed in such a way so that the traders can define which asset the bots will monitor. For instance, you might not feel comfortable to trade the cross pairs. And if your bot analyzes 10 cross pairs, there is no way you are going to use the gap trading bots. The traders should have the ability to use the specific asset in the bots so that they can also analyze the quality of the gaps.
Analyzing the type of gap
This is the most critical part of trading the gaps. To analyze the type of gaps, the bot must have the ability to assess the direction of the market trend. Identifying the direction of the market gap is not so hard. Just with the concept highs and lows of the market, the bot can easily find the uptrend, downtrend and sideways market. If the bot can assess the direction of the past trend, it can also assess the type of gap formed in the price chart.
Analyzing the risk factors
Once the gap is successfully identified by the bots, it needs to analyze the risk factors. If the gap is too big, stop loss used by the bot will be extreme. At times, it might even exceed your risk tolerance level. So, these are the signals which the bot must avoid. Since every trader has a different risk tolerance level, the bot must have the input function by which the traders can define the highest risk exposure for a certain trade.
Most importantly the bot must have the ability to deal with the risk to reward ratio. Unless it can trade with 1:3+ trade setup, the gaps should not be traded.
Execution of the trade
If the first three conditions are fulfilled by the bots, trades will be executed in the market. Just by installing a gap trading bot, you can easily create an active gap trading bots that will take advantage of the price gap. However, you must test the bot by using a demo account even though you might purchase it from the reputed companies. Without backtesting the bot, you should never connect it to the real account.