Best Way to Explain What Are Bitcoin CME Gaps and How to Trade Them?
Bitcoin CME Gaps, whereas crypto exchanges are open 24 hours a day, many traditional markets are closed on weekends. So, what happens if one of these established exchanges begins to accept Bitcoin world wild?
The number of exchanges offering Bitcoin pairs has increased dramatically during the last five years. Platforms scurry to feature crypto pairings, especially during the highs of crypto bull markets. Among these platforms is the Chicago Mercantile Exchange, also known as the CME (CME Group or Chicago Merc), which closes on Friday afternoon and does not reopen until late Sunday afternoon.
What Is the Chicago Mercantile Exchange?
The Chicago Mercantile Exchange, or CME, is one of the world’s largest and most diverse derivatives trading exchanges, with annual volume approaching a quadrillion (one with 15 zeros!) USD. CME, on the other hand, took a long time to reach that level.
The Chicago Butter and Egg Board established the CME in 1898. The name Chicago Mercantile Exchange was not used until 1919. The CME became the first financial exchange to be a publicly traded, shareholder-owned organization in the year 2000.
The CME offers futures and options on virtually any asset imaginable. It provides a standard assortment of assets such as equities, energy, commodities, foreign exchange, and interest rates – but it does not end there!CME is also used by traders to trade live livestock and even weather futures!
With such a diverse range of assets to trade, it was only natural for the CME to include Bitcoin trading. And so it did, announcing the debut of CME Bitcoin Futures at the peak of the cryptocurrency bull market in 2017.
What Are Bitcoin CME Gaps?
The Chicago Mercantile Exchange is closed for the weekend, with trading hours extending from Sunday (5 PM ET) through 4 PM the following Friday. This is not a problem for the majority of their offerings, but Bitcoin continues to move while the CME shutters its doors. This has significant implications for CME traders because some of the largest changes occur in that time range. In some circumstances, this causes individuals to miss out on excellent trading opportunities.
How To Identify CME Gap?
Consider the following example. The BTC chart below depicts price movement over a weekend in January. The chart on the right depicts the price activity throughout that weekend, which created a gap due to the difference between the open and closing candles. Because of the substantial price movement over the weekend, the CME chart (on the left) shows a higher open candle than the close candle produced on Friday, resulting in what we call a CME gap.
These CME gaps tend to be “filled,” which means that the market corrects back into the gap. While sources disagree on the exact proportion, most agree that at least 65% of CME gaps are eventually filled. In the above example, this would imply a correction back to $20,000, which has not occurred thus far, leading in a gap that may be closed. (DYOR).
However, the bitcoin market is usually stable on weekends when the CME markets are closed, preventing such gaps from arising. This is also true in the case below, when the price of Bitcoin in respect to the US dollar hardly moved an inch during CME’s closing hours. In fact, a bold move ceased during those hours, only to resume when the CME reopened.
How To Trade Bitcoin CME Gap?
Knowing that the CME gaps would be filled eventually, some crypto traders choose to open positions when the price moves away from the CME closing price. In the above example, when BTC began to show symptoms of bottoming, traders may open a long position, targeting the CME closing price at the black line.
This method works effectively in sideways markets but loses its effectiveness when the markets establish a trend. When the market is trending, CME traders tend to miss out, and unfilled CME gaps become more common.
Entering trades based on the CME gap, like other trading strategies, should always be done in conjunction with other forms of analysis, as trades based just on a gap are improbable.
to provide favorable results. For example, if an RSI divergence emerges, one could enter a trade aimed at filling the CME gap.
Other traders use this statistic to justify taking the weekends off because prices are likely to remain relatively flat throughout the weekend.
Overall, the crypto markets have been acting strangely since the introduction of CME Bitcoin futures contracts. Weekend advances have become less common, and when they do occur, the likelihood of a retrace has increased.
In any case, keep in mind that, like with any trading method, you are dealing with probabilities rather than certainties. CME gap closure is likely, but it can take weeks. Closed CME gaps are never guaranteed and may become less likely over time. For example, if Bitcoin continues its bullish path, the CME gap tactics outlined above will most certainly be less successful than they have been in recent months.
In any case, this weekend phenomena is a pattern worth noting. Observing could assist you identify a trading entry or two.
Disclaimer: This material is based on my limited knowledge and experience. It was written for instructional purposes. It should not be interpreted as advise in any way. Please conduct your own study.
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