How can we handle forex gaps?

In my opinion, the honest truth is no one can predict with 100% accuracy what happens next in forex. There is no crystal ball. The best we can do is to mitigate the risk of forex gaps.

Forex gaps can result in margin calls, especially if one is over sized on one's position. Therefore you should always practice proper money management at all times. I had three margin calls before and one of which resulted from a gap. The gap was so big that it wiped my entire account and went into negative. ( There was no way for the broker to close my positions over the weekend )

• If you are a short term trader ( days at most ) consider carefully before leaving trades over the weekend. Definitely keep a lookout for economic events scheduled for the weekend. Make sure you practice proper money management. Many investors take profits on Fridays. This is not without a valid reason. They probably do not want to face the risk of holding the positions over the weekend. Personally i wouldn't want to as well
• If you are a long term trader and is trading the right way, you probably have planned your trades well and have wide enough stop loss allowance to sustain most but the worst of gaps. Practice proper money management and this may save you from catastrophic events

A last note before i end this article. You may have heard people speculating on whether will the forex gap close.

When a forex gap closes, it simply means that the price goes back to the level it was before the gap. One possible reason for a closure will be that the gap may have happened because of a knee jerk reaction to an event. Once the commotion surrounding the event disappears, the market may realize that " Hey, that event wasn't so great after all " and normal economic forces take over and bring the price to where it was before the event. Do note however that there is no 100% rule that forex gaps will close. I will like to remind you again that nothing in forex is 100% confirmed.

Forex Technical Analysis

This article provides insight into one of the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental analysis differ greatly, but both can be useful forecast tools for the Forex trader. They have the same goal - to predict a price or movement. The technical analyst studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.

Technical analysis

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.

Technical analysis is built on three essential principles:

1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends. Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.
3. History repeats itself. Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.

Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:

• Indicators (oscillators, e.g.: Relative Strength Index (RSI)
• Number theory (Fibonacci numbers, Gann numbers)
• Fibonacci Studies
• Gann Tools
• Channels
• Waves (Elliott wave theory)
• Gaps (high-low, open-closing)
• Trends (following moving average).