Yesterday I touched on the French election happening this weekend and how it might cause ‘gaps’ in the market – specifically the euro pairs. If you missed it, catch up here: EURGBP and the French Election.
If you trade equities, you’re probably very familiar with gaps in price. As a FOREX trader, significant gaps are quite rare. This is because the FOREX market trades 24/5. In fact, if the market opens in Sydney at 11pm on Sunday evening (South African time) and closes in New York at 11pm on Friday evening, South African time, we’re really trading a 24/6 market.
GBPUSD Brexit Gaps
In the chart above we see two gaps.
The first shows price gapping up between the 17th and the 20th of June 2016. Specifically, on Friday the 17th at 5pm New York time, the market closed at 1.4347. When the market opened in Sydney on Sunday evening, price started trading at 1.4457. That’s a 110 pip ‘jump’.
The second instance shows price gapping down between the 24th and the 27th of June, this time by a massive 227 pips.
Small gaps (10-15 pips) on th majors form several times a year, typically between the Friday close and the Monday open, as the market reacts to events that happened over the weekend, while the market was closed.
Large gaps like the two we see in the GBPUSD in June last year are not nearly as common, but neither is an event like Brexit, which is what the market was responding to.
What happens to your stop-loss over a gap?
A gap in price charts means that were was no trade going on at that time, at those prices. This is especially relevant to any stop-loss you have in place. Let’s look at the first gap in the GBPUSD chart above and imagine a trade scenario.
Let’s imagine you traded the very last 4-hour candle on Friday the 17th, just before the market closed. The candle printed a bearish pin-bar, so you went short at price level 1. Your stop loss is at price level 2 (just passed the high of the candle), leaving you with 50 pips of risk. Let’s further assume that those 50 pips of risk translate to 1% of your trading account.
When the market opens on Monday morning, price completely jumps over your stop-loss. Your broker does not get you out of the trade at your requested stop-loss price, but instead, closes your losing short position at price level 3, some 112 pips away and 62 pips more than your stop-loss. Instead of losing 1%, you lose closer to 2.3%.
Did your broker do anything wrong? No.
Remember, gaps in the chart represent areas where nothing was traded or tradable – there was simply no market to get you out of your trade at your requested price, so your broker did the best possible and got you out as close as possible.