How to Trade the CME GAP

By Fizz on my Jayce | Fizz on my Jayce | 11 Jan 2022


Hello everyone, today I'm going to talk about CME gaps. This is a strategy that we are seeing used an increasing amount of time by bitcoin retail traders because of the amazing reliability that these gaps have had in filling over the past few years since CME started trading its bitcoin contract. Is it really one of those holy grail trading strategies that you can simply look at where a CME gap is and know how to trade it or is it a bit more complex than that. Let's find out.


What is a CME Gap

 

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CME is the Chicago mercantile exchange. It is the world's largest derivatives exchange and it trades everything from agricultural products such as corn and grains to your precious metals to your energy products stocks and of course bitcoin. The CME bitcoin contract trades on average about 10 000 contracts per day. One of those contracts is worth five bitcoin so that is about 50 000 bitcoins worth of volume every day which is equivalent to 2.5 billion dollars per day. However, unlike crypto, it does not trade 24/7. It closes over the weekend and for short periods of time during the week for settlement. This is how these gaps appear. The difference in price between when the exchange closes and reopens creates a gap.


Why are they important

 

Historically CME has been trading since the very early stages of 2018. The gaps that we have had within bitcoin have filled over 95% of the time and have an average size of 3% therefore you are looking at this as being incredibly reliable over the course of a number of years. It is widely accepted that these gaps are almost a bit of a self-fulfilling prophecy. If you know that there is a level on the chart and that there are a lot of traders looking at that level then it naturally is going to act as a magnet for price or you are going to get that kind of reaction when price does come into those levels where those gaps are. However, there is data you can use such as CME open interest and COT which is the commitment of traders that can determine whether a gap is more or less likely to fill. However, it is best to use confluence with other trading strategies to trade effectively.


How to Calculate the CME Gap

 

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The method for this is you can manually plot the close and open times on your chart to see the price of the CME gap. The time that the CME closes is Friday night at 10 pm UTC and the time in which it opens is the CME open which is on Sunday at 11 pm UTC.


How to Trade the CME Gap?

 

There are 3 main methods in my opinion that you can use to trade this.

  • The first one which is probably the easiest method for trading these is to fade the weekend move. What I mean by that is you are aware of the CME close price therefore you should look for shorts above and longs below. Also, you should be more aggressive as the weekend comes to an end take profit or close when the gap is filled.
  • The second is to trade the gap itself. You can take a scalp trade against the local trend as you hit the level where the gap is.
  • The third is the most complex one. That one is to counter the gap traders. This is based on the concept that basically if there are too many traders looking for a certain trade it is not likely to work out that way. If there are too many traders looking for a gap fill you can take the opposite position. Overcrowded trades are less reliable therefore you can counter the move and look for a trade that will hit the stop losses of these traders.

Those are the 3 main methods that I use for trading these gaps, but of course, it is always used with confluence with basically other trading strategies that I do have.


Important notes for traders

 

  • 95% of gaps fill in time.
  • 70% of gaps fill within one week.
  • 35% of gaps fill within 24 hours.
  • The smaller the gap size, the higher the probability of a gap fill on Monday.
  • 55% of gap fills see a counter trade stop hunt before reaching the gap with the majority of these stop hunts occurring on smaller gaps that are being looked at by more traders.

Conclusion

 

My basic takeaway from this is that gaps can be a useful addition to your trading strategy but you should only be traded when there is confluence with other methods of technical analysis so be aware of what else is going on. Use your general market structure take a look at your order flow and just be aware of those.


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Hope you found today’s article helpful. If you want to learn more about trading follow me at @Fizz-on-my-Jayce. Have a nice day :)

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Fizz on my Jayce
Fizz on my Jayce

Crypto trader & Investor. I show my opinions, trading tips, and nothing is financial advice.


Fizz on my Jayce
Fizz on my Jayce

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