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.

Gaps in the Forex Market

One of the main differences between a stock market and the FX market is that the FX market is a true 24 hour a day market. Trading is continuous around the clock and really only is closed on weekends due to the lack of volume rather than an actual close. The result of this is that you very rarely see gaps on the FX related charts. A gap is when the open of one session is far enough away from the previous close to leave an actual gap on the chart. There can be many gaps on stock market related charts since the market stops trading late in the afternoon and will not reopen until early the next morning. If a company’s earnings are released after the close, the next day’s opening price can be much higher or lower than the previous close. Any news item that causes a shift in the opinion of the value of the market can result in a gap on the chart. In the FX market, you do not see these gaps during the week as the market is open and trading. However, you can see gaps between the Friday closing price and the Sunday open.

This week’s trading is a good example as the chart below notes a gap as a result of the G7 meeting over the weekend. You can find more on the G7 meeting at www.dailyfx.com, but the chart shows that the EUR/GBP opened much lower on Sunday than it closed on Friday. When you see a gap on a chart, the first thing traders will look for is for the market to move back to fill the gap. 

If the market gaps from 1.2500 up to 1.2525, traders will look for a move back down to 1.2500 to fill that gap and then reevaluate the news and its influence on the trend. We can see where this is exactly what happened last month as the market opened higher than the previous close and eventually moved back down to fill that gap before continuing on with the uptrend. 

The gap from this last weekend has not yet been filled and I would suspect that many traders are following this closely to see if that happens once again.