How Can the Weekend Gaps Stop You Out and What Brokers Do?
Most traders are always worried about the weekend gaps, and so they don’t take any positions on Fridays’ afternoon.
Many of them think that they have to close their positions before the weekend because if the market opens with a big gap up or gap down on Sunday afternoon, then they can get stopped out and lose money.
First, please learn what weekend gaps are: What Are the Weekend Gaps in Forex Market?
Yes, weekend gaps can stop you out in case they open where your stop loss is, or above it in case of a short position, or below it in case of a long position.
Additionally, usually the spread is higher than normal when the markets open on Sunday afternoon. This can also help the weekend gaps to hit the stop loss of your short positions easier. This is a problem only for the short positions because you don’t pay the spread when you go short. You pay it when you want to close your short position which is when you buy.
Brokers are the ones who usually don’t lose because of the weekend gaps. Unfortunately, trading is a win/win game for the brokers and a win/loss game for the traders most of the time and this is what the retail traders who trade through the brokers have to consider.
If you have a long position (you have bought) and then the market opens with a gap up (it means the market opens on Sunday afternoon while the price is above the level it closed at the market close on Friday afternoon), then it doesn’t hit your stop loss which should be several pips below the market open price on Sunday afternoon.
Indeed, a gap up is a favorite event for you when you have a long position and you haven’t set a target order, because the gap up will add to your profit and if you close your position manually, the profit will be in your pocket. However, when you are long and you have set a target already, and then the market opens with a gap up which is higher than the level you have set your target, then the broker closes your position where your target is set to, not where the market opens with a gap up on Sunday afternoon. If you ask the broker about the reason, they will you that your position was closed where you had set the target and there is nothing wrong with it. That is a good answer, but I wish it was the same when the gap is against you.
If you have a short position (you have sold) and then the market opens with a gap down (it means the market opens on Sunday afternoon while the price is below the level it closed at the market close on Friday afternoon, then it doesn’t hit your stop loss which should be several pips above the market price on Sunday afternoon, and your position remains open if no target was already set. But, when you have already set a target for your short position and then the market opens below it on Sunday afternoon (gap down), then the broker closes your position at the level that your target was set, and so, you can’t take the advantage of that part of the gap down which is below your target.
What about the cases that the gap is against you?
When you are long and the market opens below your stop loss, then your position will be closed where the market is opened, not where your stop loss is set to (and so you lose more than your stop loss), whereas if the broker or liquidity provider wanted to treat this like when the gap is above your target, then the best thing they could do was closing your position at the stop loss level. But they don’t do it.
It is the same when you are short and the market opens above the stop loss level. The broker closes the position at the market open price not at the stop loss level.
What does it means?
It means when the gap is in your favor and the market opens with a better price than what your target is, then the broker doesn’t allow you to take the advantage of the extra profit and closes your position at the target price.
But when the gap is against you and the market opens with a price which is worse than where your stop loss is set, then the broker doesn’t close your position at the stop loss level and your position will be closed where the market opens, and so, you lose more than your stop loss says.
As I explained earlier, this is what even the true ECN/STP brokers do because this is not under their control and the liquidity providers do it.
Market maker brokers do their best to take the advantage of the gaps. They not only do what I explained above, but also they increase the spread as much as they can to make the traders who have a short position lose even more.
What Is the Solution?
If you have to trade through the retail brokers and you can’t trade through a bank account, then you’d better to trade the longer time frames, so that you will have to set wider stop loss orders that can’t be easily hit by the gaps or too wide spreads at the market open.
Also, you’d better to cancel your target orders before the weekend and then set them a after the market open when the spread is back to normal.
Holding no position during the weekends doesn’t make sense because you should be able to trade when a strong trade set up forms, no matter what weekday it is. Trading the longer time frames enables you to do that without having to be worried about the weekend gaps and wide spreads, of course if the broker doesn’t increase the spread for hundreds of pips, and if an exceptionally too big gap doesn’t appear on the charts.
Good luck 🙂