Well, I’m here to tell you that you don’t have to see that gap in Forex like you see it in Stocks to trade this Reversal Pattern.
In Forex you will not get an Exhaustion Gap like this because it is more liquid than the equity market. Rather, you will see a big momentum candle body, followed by a period of consolidation which then ends with another big momentum candle in the opposite direction which then changes direction.
While Exhaustion Gaps look different in Forex and Stocks, they both share 3 features:
- They form after a large trend.
- Higher than average trading volume happens on the day.
- The Gaps occur immediately when the market opens after the weekend.
The reasoning behind the Islan Reversal Patterns is that after the trading asset has been in a major trend in one direction, it goes into consolidation for a period that could take days or weeks.
And then usually, banks and large institutions hold their money or exit their positions during the large consolidation in preparation for a major trend change before the public knows about it.
Also, all major meetings or economic news that could cause a big impact on the market tend to happen because of meetings held between major countries on the weekend.
So when the market opens on Sunday or Monday, the market looks for pricing in that major fundamental change and ends up causing a big gap and followed by a large momentum candle.
Our job is not to predict when the gaps will happen but to look for an entry after they occur at the retest of that 2nd gap as shown in the picture below.
In terms of Stop Loss, you would need to place the stop loss above the resistance of the 2nd gap.
In terms of the Profit Target, you should be targeting previous lows or highs depending on the trend direction change.
