Making money from empty spaces: How to trade the ‘Greek Gap’
Well, the first card has fallen…
As I’m sure you know by now, Greece imposed capital controls on Sunday. The Greek government announced the banks will be closed for the week and left citizens scrambling to turn whatever cash they could get their hands on into something tangible.
Latest speculation hitting the newswires has the European powers-that-be forcing Greece out of the monetary union if austerity demands are rejected in the coming Greek referendum. And in return the Greeks will apparently seek a court injunction at the European Courts of Justice. They’ll attempt to block any attempts made to have them kicked out via the legal system!
So it looks like the ongoing farce has some mileage left yet. And however you look at this it’s difficult to come away with anything positive. The most worrying thought, of course, is that this might only be the small catalyst that kicks off bigger Global events.
Two ways to go bankrupt
“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually, and then suddenly.”
Have you heard that before? It’s from Ernest Hemingway’s, The Sun Also Rises.
It illustrates nicely how ‘black swan’ events have a habit of starting off with something small and relatively inconsequential. You might not see it coming but everything else can then get sucked in to a hideous black hole and begin unravelling with parabolic rates of acceleration.
It’s always easy to see the chain of events in hindsight, of course, but not so easy to do with any great accuracy in real-time. But I think it’s fair to say we will almost certainly see some bigger changes on the economic horizon – and I suspect some of them will not be too pretty.
But anyway, there are far brighter economic minds than mine at work on these very problems so we’ll leave the big-picture thinking to them. (These things never work out how anyone anticipates anyway!)
So do you want to hear something amusing instead?
With uncharacteristically bad timing, my better half is actually in Greece at the moment! Yes, she’s on the ground right in the thick of it. Well, not quite urban Athens, more like a shaded beach lounger on a Greek island somewhere.
She’s been planning this trip for the last 18 months. It’s part of extended 40th birthday celebrations that her and three of her friends have been milking for all its worth. They’d decided the various nights out and weekends away weren’t quite enough so they’ve muscled in a full-on seven-day holiday too!
It was all coming to a head in Greece when they flew out last Tuesday, so she departed with a wedge of Euros (she didn’t want to rely on bank cards in case they stopped being accepted) and some packets of ’emergency ration’ dried pasta (you know, just in case).
I’ve been sending her little economic bulletins through the week. I can just picture them scratching their heads around the pool as my comments on market volatility arrive via text message. I think their main concern was simply that the hotel could still pay the booze supplier!
But joking aside… what could be seen as an outrageous inconvenience to British tourists – imagine, having your holiday ruined! – is a life-changing and desperate situation to multiple generations of Greeks. Not good. And who’s next – Spain? France?
The weekend’s events did leave some nice examples of gap-opens on the charts when the markets reopened on Sunday though. So despite all the macro-economic doom and gloom, don’t overlook how YOU PERSONALLY might actually be able to take advantage of events!
Let’s have a look at how you can use gaps – we might be seeing more of them as this whole situation plays itself out.
The Greek Gap – finding trades in empty spaces
Price gaps are one of the most prominent features you’ll see on a chart. And whether you follow candlestick charts, or the traditional OHLC bar charts, there’s something about a blank space in among the action that really stands out.
So gaps in price have been around for as long as traders have followed markets. They are simply areas where no trades have taken place so a blank space is left behind.
And remember how nature abhors a vacuum (I’m testing your recall of high-school physics here)?
Well, it’s pretty much the same in the markets. There is a very high probability that the gap will be filled by later trade because the market just can’t bear to not know what was missed and left behind in that empty space.
We’re a bit limited for regular opportunities in the currency markets because they trade 24 hours a day Sunday to Friday. It means we don’t get so many opening gaps like you see in the equities markets. But it’s always worth looking out for opening gaps in the various Forex pairs as they start to trade on Sunday evening.
A gap in price is simply showing you that an event took place over the weekend (when the market was closed) that changed market sentiment enough for it to open at a noticeably higher or lower price on the Sunday evening.
It just marks a re-evaluation of market price. If the markets had been open for business you’d see the price bars printing as normal. It’s only because the markets were closed and unable to record the changes in price that the gaps put in an appearance.
But how can you take advantage of the Gap phenomenon?
Well, once you’ve spotted your gap you can take confidence in the market making moves to fill it – it tends to happen sooner rather than later – so it can be a simple case of keeping trades pointing in the gap’s direction until the hole has been filled.
Here’s the opportunity from EURUSD last week so you can see what I mean:
EURUSD – 60-minute chart
So you can see from the above chart that the market closed on Friday around 1.1158. Things were jittery because of speculation over what would happen in Greece, but that price is where the market decided ‘fair value’ could be found at the time.
Fast forward to Sunday evening and you can see the effect the capital controls and bank shut-down announcement had.
Fair value – the price at which a buyer and a seller were prepared to conduct business – had dropped like a stone to the 1.1000 level. That’s a price gap of 158 pips, a pretty big one as far as the Forex markets go!
So imaging you’ve seen all this happen and you now want to come up with your dastardly plan to take advantage…
If you did nothing else but keep trading to the buy side while the market was trading between Sunday’s open and Friday’s close (anticipating that the gap will be filled), you’d be swinging the odds massively in your favour.
It won’t work out for you on every gap trading opportunity, of course, but you’ll be trading in line with the market flow on something like eight of these types of trade in every ten. And that’s a big advantage.
So let’s see what happened next…
So you can see the market made a run to the upside as soon as Europe came online at 7am (the tall blue candlestick). You can see the first bit of profit taking coming in as the market retests the swing low point from Friday afternoon.
The gap has not been filled yet, but those spots will be used by traders raking their money off the table early, so keep an eye out for features like that. It can often be more prudent to cash in your chips while the market is still making a run for the gap. No need to squeeze every last pip and risk giving back your hard won profits!
No danger of that happening on this occasion though…
The market powers through the bit of selling pressure that came in at the swing low (see the area shaded orange), filled the gap, and just kept motoring!
So all you needed to do was find ways to get long as the surge in volume came in from the European desks.
Five-minute candlestick patterns, moving average crossovers, point and figure patterns… buying signals are manifold and they are just the tactical tools that let you execute your trading idea. It’s the overarching strategy – the concept of a high probability move to fill the gap – that can fill your coffers when you spot these things.
But most importantly of course… you must be willing to actually take action!
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 1st July
08:55 EUR German Manufacturing PMI
09:30 GBP Manufacturing PMI
13:15 USD Non-farm employment change
15:00 USD ISM Manufacturing PMI
Thursday 2nd July
09:30 GBP Construction PMI
13:30 USD Employment numbers
Friday 3rd July
All day USD US Independence Day
09:30 GBP Services PMI
CAUTION! Be aware of forthcoming developments in Greece over the weekend. Consider flattening positions before the markets close for the weekend!
Monday 6th July
15:00 USD ISM Non-manufacturing PMI
Tuesday 7th July
09:30 GBP Manufacturing production
Keep an eye out for early jobs number data from the US this month – it’s out on Thursday instead of the usual Friday – and whatever you do, mind those Greek gaps!
Until next time, happy trading!
P.S. Don’t forget to nip over to the TN Facebook page here. Hit ‘like’ and leave me a quick comment if you can – let me know what you’ve been up to with your own trading.