Forex Charts - Exhaustion Gaps a Hugely Profitable Chart Formation

If you use forex charts trading exhaustion gaps can be hugely profitable. There one of the most reliable chart patterns to trade if you know how to take advantage of them. They don't come around often in forex trading but when they do, there a great formation and you can get some great profits.

What is a gap?

A gap in a chart is exactly as it sounds:

An empty space between one trading period and the previous trading period.

They usually form because of an important an event or in a market that is dominated by greed and fear. They tend to be highly reliable, because they reflect a highly reliable trait in human nature.
Short term price spikes never last for long and prices tend to return to areas of more realistic value.
The above reflects human nature pushing prices too far (as they always do) away from fair value and prices return after greed and fear has run its course.
Exhaustion gaps are marked by high volume, and can offer tremendous fade trade opportunities, with excellent profit potential as the tide turns and momentum shifts quickly.
Fact:
In most cases exhaustion gaps are filled soon after they are formed.
These emotional price gaps caused by panic and fear provide some excellent trading opportunities when looking for a reversal. The question now is how do you trade them?

There are several options open to you:

One of the best is to look for over bought oversold indicators and look for extremes - like the stochastic or the Relative Strength Index and hit a downturn from extremes.

You can wait for the gap to be filled (checking of course momentum supports your view) but another way is to top and bottom pick with options.

While forex options are not as popular as they once were, they can be an excellent risk control vehicle, offering you unlimited profit potential combined with limited risk.

All you have to do is trade in the money from the price you buy your option.

So hit it at the money and buy 3 months to expiry and get time on your side and you can ride out any short term volatility - you don't have to be to fussy about timing your trading signal, so long as you are confident the price spike will fade.

Exhaustion gaps are one of the best if not best chart formation to trade, as they reflect extreme emotions that normally fade within a very short period of time.

You don't get to many exhaustion gaps in forex, because it's a 24 hour market and they really only come over the weekend on the open of Far East trading after the weekend.

A Chart Formation for Big Profits

Human nature never changes and short term price spikes will continue to reoccur as greed fear, drive prices. They never last long and if you use gaps and exhaustion gaps in particular, you will have one of the most reliable chart formations to trade.