We’ve seen a mishmash of gap trades so far this year…most of which have, quite honestly, sucked royally compared to the gaps to which we have come accustomed. We’ve either had no tradable gaps, gaps that have taken two to three weeks to hit targets after going 300+ pips against us, or we’ve had gaps that shocked us and hit our targets almost instantly. So, what’s different about this year’s gaps so far compared with other years?
Gaps are normally unpredictable. We all know that. But this year, they have taken that unpredictability to a new level. This is why it is SOOOOOOO IMPORTANT that you adjust for your spread when trading gaps.
If you are a client of mine, you know I pick targets that just barely get kissed by price action before reversing and leaving you in the dust. I do this on purpose. I want to squeeze as much out of that first attempt at closing the gap so we can HOPEFULLY be in and out with a cool, clean profit quickly. This not only is good for our Forex account equity but frees up that equity for other trades. Also, those quick increases add to your trading equity to help grow your account.
Now, there is something you MUST do when trading gaps with me. You MUST adjust for your spread–as you should in all of your Forex trades. I’m mentioning this yet again because gaps have been really weird this year–weirder than normal, if that’s even possible! 
You do not want to be stuck in a gap trade without a stop loss after the market has made its first attempt at closing it. Of course, in all likelihood, it WILL close the gap…eventually. But you never know how long it’s going to take. Could take just a few hours, days, weeks…oh no…months! You just never know and there are no guarantees in Forex Gap trading.
Here is a great example of how I typically trade gaps. Check out this picture and why it is so VITAL to adjust for your spread with my gap trades. These are pictures of the three gap trades we took this evening.
As you can see, the salmon-colored lines are the targets I sent out 10 minutes before the market opened at 5PM EST. The first chart is GBP/JPY, the second USD/JPY and the third EUR/JPY.
Both USD/JPY and EUR/JPY hit my target and went 2 pips below it then went sideways for an hour before reversing. This is what I’m talking about. Had you not adjusted for your spread, you would still be in these trades after it reversed, which is way uncool.
Because I trade with FXDD, my spread on USD/JPY is 3 pips. EUR/JPY is 4 pips on the spread. Since we shorted these trades at market open, I need to add my spread in pips to the targets. So, for the USD/JPY trade, I need to adjust my own target to 90.59. For the EUR/JPY trade, I had to adjust my target to 124.69 instead of 124.65 since my spread is 4 pips.
Why do you need to do this? Because you always have a bid and ask price. The ASK price is the LOWER of these two prices. It’s the price at which you are willing to SELL. The BID price is the HIGHER of these two prices and it’s the price at which are willing to BUY.
Ever noticed when you want to short a currency, you short at the current price that’s listed on your chart? This is the ASK price. Immediately after you’re in the trade, you are down several pips. This is because you instantly jump to the bid price until your trade either stops out or takes profit.
Now, here’s where it gets hairy. You often CANNOT SEE the bid price on your platform. This makes it especially difficult on short orders because our trade is now live at this invisible bid price.
Since I have a 3-pip spread on USD/JPY, I click sell and I’m immediately down 3 pips and now live at the bid price. If you look in your terminal, you’ll see the current price is not the same as your chart price. This is because your chart price is the ASK price. Your short trade, however, is now on the BID price.
So, getting back to our gap trades and adjusting for your spread…
Tonight, price passed my target by 2 pips and then reversed. Look above. If you did not adjust for your spread, even though price (the ASK PRICE) hit my target by 2 pips, the BID price missed the target by 1 pip.
When you have a short trade, you MUST, MUST, MUST add your spread in pips to both the target AND the stop loss. This ensures that you will take profit (or stop out) at the correct, given price.
You will also notice on any long orders you place, you are forced to buy at a higher price than you can sell. Again, this is your spread in action. It’s your Forex broker making sure they get a small slice of your tasty Forex profit pie. Once your trade is live, the price you see in your terminal is identical to the price on your chart and you are instantly down your spread in pips again.
When you are given a long order signal, you ALWAYS need to add your spread in pips to the entry price. So, if the entry price is 1.0145 and your spread is 3 pips, you will need to make that adjustment and enter the trade at 1.0148.
But Caden, why do I have to add my spread twice for short/sell orders but only once for long/buy orders?
It’s simple, really. You only need to adjust for your spread on the buy portion of your trade. When you’re in a long trade, you are only buying at the beginning of the trade when you enter. When you short a currency pair, you are initially selling and you need to buy to cover that short for both your stop loss AND your target. Both of those portions of your trade are really buy orders. You’re buying to cover. Thus, the double whammy on short trades. Your stop loss is bigger and your target is smaller–by your spread in pips.
Sucks, doesn’t it? But, hey, everyone needs to do it so just take the hit and get used to it.
If you are trading Forex signals and not making these small spread adjustments, you are really doing yourself a huge disservice–especially when trading my Forex Gap Trades!
In my alerts, when I write ADJUST–IT’S A MUST, I really mean it! Forex gaps can be a beastly, waking nightmare for weeks on end if you miss the target…especially if you missed the target because you didn’t adjust for your spread.
Cover your ass and adjust for your spread with every single trade you take–especially Forex Gap Trades when the stakes are high and the risks AND profits are gargantuan!
ADJUST–IT’S A MUST!
Oh yeah, by the way, we ganked 106 pips on those three trades this evening. They all hit my targets (after adjusting for your spreads) in less than 65 minutes. Nice way to start out any trading week!
you are very talented.
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