What Are Bitcoin CME Gaps and How To Trade Them?
Crypto Basics

What Are Bitcoin CME Gaps and How To Trade Them?

8 months ago

CoinMarketCap Academy takes a dive into Bitcoin CME gaps — exploring what they are, why do they occur and how professional traders use them as entry/exit points.

What Are Bitcoin CME Gaps and How To Trade Them?

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Where crypto markets operate round-the-clock, many traditional markets remain closed during the weekends. So what happens when one of these traditional exchanges starts offering Bitcoin? In today's article, CoinMarketCap Academy dives into this situation to see how it affects crypto prices.

In the past five years, the number of exchanges offering Bitcoin pairs has skyrocketed. Especially around the highs of crypto bull markets, platforms scramble to list crypto pairs. Among these platforms is the Chicago Mercantile Exchange, commonly referred to as the CME (CME Group or Chicago Merc), an exchange that closes on Friday afternoon – and only reopens late Sunday afternoon.

What Is the Chicago Mercantile Exchange?

The Chicago Mercantile Exchange or CME, is one of the biggest and most diverse derivatives trading exchanges in the world, trading approximately a quadrillion (one with 15 zeros!) dollars in volume per year. It took quite some time for CME to get to that level though.

The CME was founded in 1898 under the name “Chicago Butter and Egg Board.” It wasn’t until 1919 that the name Chicago Mercantile Exchange was used. In the year 2000, the CME became the first financial exchange to be a publicly traded, shareholder-owned corporation.

The CME offers futures and options on any asset you can possibly imagine. It offers a regular bunch of assets including stocks, energy, commodities, foreign exchange and interest rates - but it does not stop there! Traders also use CME to trade live cattle or even weather futures!
Fun Fact: In 1961, the CME launched its first futures on frozen pork bellies!
With such a wide range of assets to trade, it only made sense for the CME to offer Bitcoin trading as well. And so it did, announcing the launch of CME Bitcoin Futures at the height of the 2017 cryptocurrency bull market.
Previously, CoinMarketCap Academy published an article discussing the relationship between the CME’s Bitcoin Futures expiry and cryptocurrency prices. Following that, the gap between CME’s trading hours and the 24/7 activity in Bitcoin markets offers some interesting insights as well.

What Are Bitcoin CME Gaps?

As said earlier, the Chicago Mercantile Exchange closes for the weekend, observing trading hours from Sunday (5 PM ET) to 4 PM the next Friday. For most of their offering, this presents no problem, but Bitcoin keeps moving while the CME closes up the store. This can have big consequences for CME traders, as some of the bigger moves happen right in that time frame. In some cases, this causes them to miss out on great trading entries.

How To Identify CME Gap?

Let’s look at an example. The BTC chart below visualizes price action over a weekend in January. The chart on the right shows the price action over that weekend, creating a gap due to the variation in the open and the closing candle. Because the price moved strongly during that weekend, the CME chart (on the left) has a higher open candle than its close candle formed on Friday, resulting in what we call a CME gap

These CME gaps have a tendency to get "filled” – meaning that the market corrects back into the gap. While sources struggle to agree on the exact percentage, most of them agree that at least 65% of CME gaps are filled eventually. In the example above, this would mean a correction back to $20,000, which has not happened so far –  resulting in a gap that might get closed (DYOR).

Most of the time though, the cryptocurrency market tends to be stable during the weekends while the CME markets are closed, preventing any such gaps from occurring. This is also true in the below example, where the price of Bitcoin in relation to USD barely moved an inch during CME’s closing hours. In fact, a strong move got paused during those hours, only to resume as soon as the CME reopened.

Essentially, the CME close price acts as a magnet, keeping prices in place until the CME markets reopen again. Even if the price manages to escape the magnet, the market ends up finding its way back to that same level – as shown in the chart below.

How To Trade Bitcoin CME Gap?

Knowing the high likelihood of the CME gaps being filled eventually, some crypto traders like to open positions when the price gets away from the CME closing price. For example, when BTC started to show signs of bottoming in the above example, traders could open a long position, targeting the CME closing price at the black line.

This strategy tends to work well in sideways markets but loses its edge when the markets enter a trend. With a trending market, CME traders tend to miss out and unfilled CME gaps become more common.

As with other trading systems, entering trades based on the CME gap should always be done in conjunction with other forms of analysis, as trades based purely on a gap are unlikely to yield positive returns. For example, when an RSI divergence forms, one could enter a trade targeting the CME gap fill.

Other traders use this statistic as a reason to take the weekends off, as prices have a high likelihood to stay relatively flat over the weekend.

Closing Thoughts

All things considered, the crypto markets have been behaving differently since the launch of CME Bitcoin futures contracts. Weekend moves have become less common, and when they do happen, the likelihood of a retrace is higher than it used to be.

In any case, it is crucial to remember that as with any trading strategy, you are working with odds rather than certainties. CME gap closes are likely, but they can take weeks to happen. CME gap closes are never certain and may become less likely over time. For example, if Bitcoin continues its bullish trend, the CME gap strategies mentioned earlier will likely turn out less successful than they have been in the last months.

Either way, this weekend phenomenon is a pattern worth observing, and it might help you find a trading entry or two.

Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.

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