CoinMarketCap Alexandria 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.
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 Alexandria dives into this situation to see how it affects crypto prices.
What Is the Chicago Mercantile Exchange?
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.
Fun Fact: In 1961, the CME launched its first futures on frozen pork bellies!
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
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?
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.
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.
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.