Trading Bitcoin on Crypto derivatives exchanges can follow many strategies, but regardless of your trading strategy and the type of trader you are, it is always an excellent decision to mind the CME Gap.
CME Gap trading might be the ultimate opportunity you were looking for to time the market using contract expirations.
And during the current Bitcoin price movements, you should definitely know how to trade them.
And that is why I am here with everything you should know before getting your hands on them, so without any further delay, let’s begin with a brief introduction about CME.
Bitcoin Futures Market Gap, commonly known as the CME Gap after the name of the Chicago Mercantile Exchange (CME), started offering futures contracts for BTC in 2017.
CME allows a maximum of 2,000 nearest expiration date futures contracts and 5,000 contracts across different maturities. So what are these, you may ask?
What Is Bitcoin Futures Gap or Bitcoin CME Gap?
Bitcoin Futures lets you bet on Bitcoin’s future price, gaining exposure while selecting but not actually buying Bitcoin from the seller.
With Bitcoin Futures, suppose you enter a contract to purchase BTC at $14,000 by the end of the month, even though the current price is $16,000. In this contract, you are required to pay a small premium to reserve your decision on whether to buy or not if the price drops to $14,000 on the due date.
Suppose the price doesn’t fall as per your expectations, the contract expires, and you’ll only lose that small premium you paid in the beginning.
The contract’s value depends on Bitcoin’s current value.
CME makes use of the Bitcoin Reference Rate; a volume-weighted average price for BTC-sourced exchanges and is calculated daily between 3:00 PM and 4:00 PM London Time.
Additionally, Bitcoin Futures trading keeps you safe with price limits that enable you to curtail your risk exposure to the asset class.
With Bitcoin futures, you don’t need to create a Bitcoin wallet or put real money into custody for storage and security of your funds while trading because there is no involvement of physical Bitcoin exchange.
Cash-settled contracts add an extra benefit by eliminating the risk of physical ownership of a volatile asset.
While trading Bitcoin Futures on most traditional exchanges, there is a particular time to open and close. Similarly, there is a specific time for Bitcoin CME trading which starts on Sunday, 6:00 PM EST and closes on Friday, 5:45 PM EST.
This CME gap is the difference between the trading prices of Bitcoin futures contracts when the market closes on Friday and reopens on Sunday. The gap occurs because there are no trades between the closing period on Friday and the opening on Sunday.
Moreover, the gap can also occur during holidays when the CME is closed. When Bitcoin CME closes, the BTC price moves as usual, but as the market is closed, the movement is not recorded on the price chart.
Subsequently, when the market opens on Sunday, the price continues at the same price as the spot market creating a gap on the price chart which needs to fill, which I will tell you more about now.
How & Why CME Gaps Get Filled?
Filling of CME Gaps means the price has moved back to the original pre-gap level. There is a high probability of gaps getting filled, following are the reasons for it:
- The initial spike may have been too optimistic or pessimistic, inviting a correction.
- Sharp up or down price movement leaves behind no support or resistance.
After the market reopens as time progresses, traders realize that the charting data shows some weak points, so they start selling. Eventually, the price hits the closing value, filling the gap.
Moreover, CME gaps also get filled because of the consensus effect, where most traders assume the gap will get filled; they place trades keeping the gap in mind. This affects the normal price movement and ensures the filling of the CME gap as predicted.
What are the effects of the Bitcoin CME Gap on your Trades?
Bitcoin CME often gets filled. Here, the spot price closed on Friday and reopened on Sunday should either fall back or move upward to fill the gap. So, the filling can go both ways.
Suppose the BTC price closes at $19,000 on Friday and reopens on Sunday at $17,000. Hence there is a gap of $2,000 that was not recorded.
In a situation like this, many traders assume that the price will go back to $19,000 to fill the gap. This proves to be true in the majority of the cases.
But it is essential not to be determined in taking the call and should always be assumed with probability.
Moreover, the CME gap doesn’t necessarily get filled, just the probability of getting filled is higher.
Filling the gap can take hours on end, if not days or even weeks; therefore, other indicators should also be referred to while making a trade.
New to Crypto Futures Trading? Know How much money you need to trade Futures contracts
How can you gain from CME Gap?
Now, the most crucial part is how to use Bitcoin CME Gap to your advantage. Well, there are multiple ways to do that. Let’s discuss them now:
- Method 1 “Buy low, Sell high.”
The first method is to buy BTC and go for a long position. It would require you to time BTC at a lower dollar price and sell it after the price rises.
A significant benefit of doing this is that it relies solely on your observation and buying it; rather than speculating it hence decreasing the risk.
- Method 2 “Sell and Buyback”
The second is to take the position before the price dips. You can sell an amount of BTC you hold at a higher price waiting for the CME dip to occur. Then buy them back with the money you sold your original position, ending up with more BTC than you previously had.
- Method 3 “Using Leverage”
Next, you can use different crypto exchanges to trade positions using leverage or margin trading by putting collateral to borrow.
This allows you to buy larger positions at the market’s reopening price (buy long), which is lower, and when the market price eventually climbs up to the closing price, you are rewarded with a much higher profit, further boosted by the leverage.
If you expect a price drop, you can sell your leveraged BTC (short sell) before the drop and buy them back at a lower price with more BTC holding, returning the loaned amount and eventually owning more BTC.
So, this was all about the Bitcoin CME Gaps, which you should know before you start trading them.
Bitcoin futures is a great product to boost your overall trading profits; while keeping the CME Gaps in mind; it further amplifies your profitability, letting you take complete advantage of the market’s volatility and exposure.
Moreover, during a bearish movement of Bitcoin trading, CME Gaps may help you increase your positions over time and trade with greater BTC holdings, offering you more significant gains.
So, what are you waiting for? Start your CME Gap trading journey today.