Strategy Video: Lessons from Oil and SPX to Evaluate GBP/USD Gap

Talking Points:

• Gaps primarily occur around market closures - whether regular times for equities or irregular like weekend in FX
• Trading around these events requires a full understanding of what facilitates and motivates the sharp movement
• The S&P 500 and Oil have both exhibited noteworthy gaps, but does that translate into trading strategy for GBPUSD?

See how retail traders are positioning in the majors using the FXCM SSI readings on DailyFX's sentiment page.

Gaps can generate considerable interest from traders looking for volatility, and the Pound crosses have recorded some particularly enticing examples that seem to progress strong technical setups. Yet, the draw of these remarkable moves can prove siren call to hidden dangers. The GBPUSD is a great example of this particularly dangerous draw. The pair broke an inverse head-and-shoulders pattern neckline and its 100-day moving average - after more than 250 days below the pattern - on Monday's gap. Even if we were dubious of the gap, the technical back would seem to provide more conviction to work with. However, that risk assessment quickly shifts when we consider that there is the FOMC rate decision and UK GDP figure due on the same day. The first thing to ask when assessing a gap for its 'tradability' is: why did this gap occur. That closer evaluation requires a more comprehensive decision to be made. We look at gaps from oil and stocks to see if there are lessons to adopt for FX gaps - and particularly the Pound moves to start this week - in today's Strategy Video.

To receive John’s analysis directly via email, please SIGN UP HERE