Bitcoin has established itself as a prominent and viable alternative asset class for traders. Even for those who may not have a particular interest in the world of cryptocurrencies, the sheer volume and volatility of Bitcoin's trading activity is difficult to overlook.
The asset’s high-profile nature has been amplified by the advent of a wide range of financial instruments, leading to the emergence of the Bitcoin Chicago Mercantile Exchange (CME) gap on its futures contracts. Though a highly technical concept, it presents a valuable opportunity to capitalize on market discrepancies.
In this article, we’ll walk you through what the Bitcoin CME gap is and how to identify and trade it.
What is the Chicago Mercantile Exchange?
The CME was launched in 1898 as a commodities exchange, mainly dealing with agricultural produce. However, the exchange saw a major rise in interest when it introduced currency futures trading in 1970. Eventually, the Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), and Commodity Exchange Inc. (COMEX) merged to form the CME Group in 2007. CME is now one of the world’s largest futures exchanges.
In 2017, CME took a major step by listing Bitcoin futures on its exchange, which proved to be a significant achievement for both Bitcoin and CME. For Bitcoin, it was the first time traditional traders could gain exposure to the asset on a major exchange. Meanwhile, it was the first time CME had branched out into digital currencies.
As the popularity of Bitocin futures grew, CME launched micro Bitcoin futures where each contract was worth 0.1 BTC instead of 1 BTC.
However, major differences exist between cryptocurrency markets and traditional markets like CME. This fact gave rise to the Bitcoin CME gap.
Understanding the Bitcoin CME gap
Cryptocurrency markets don't close, meaning they're tradable 24/7. However, the CME differs and is open for trading from Sunday (5pm ET) to 4pm the next Friday, closing for the weekend. While CME is closed, trading still happens on other exchanges. The “CME gap” is when the opening price of a Bitcoin futures contract is significantly different from its closing price.
Why does the CME gap occur?
The CME gap occurs primarily because of CME’s closing hours and cryptocurrency exchanges like OKX, which operate 24/7. If a significant news event happens when the CME is closed, the CME gap will be much larger. Weekends also see significant price swings. Most traders don't trade during the weekends, and the volume is usually low. This means traders can easily move the market in the direction they want during this time.
The significance of the CME gap for Bitcoin traders
Historically, the gap has always been filled once the market opens. Therefore, it's an opportunity for traders to trade in its direction. Then, there’s the psychological impact and sentiment around predicting the market. Traders place trades anticipating the gap to fill, which itself could move the price more towards the gap.
The gap is also a market sentiment indicator. If the gap is upwards, it indicates that sentiment during the weekend was bullish. Similarly, if the gap is downwards, it indicates that sentiment was bearish. You don’t have to trade the CME to make use of the CME gap. Instead, understanding the CME gap can give you a better understanding of the market and help you manage your risks accordingly.
Finally, there are the CME gap trading opportunities. Some traders focus specifically on trading the gap. They only enter trades when there’s a gap on CME, seeking to make gains when the gap is filled. For example, if the gap is upwards, the trader places a long position when the CME opens.
Traders have no clear consensus on the significance of the CME gap. For some, the gaps are important support or resistance points, as the price often returns to fill the gap later. However, others believe that CME gaps are purely technical since CME isn't open and doesn't hold any value for technical analysis.
How to find the Bitcoin CME gap
Let's look at Bitcoin’s price movement on the first weekend of December 2023, when it saw significant volatility. Bitcoin went up by nearly 5% on OKX and other exchanges.
If you look at the chart of Bitcoin CME during the same period, you can see a major gap. When trading closed on Friday, Bitcoin was priced at about $39,300. However, when trading opened on Sunday, it was at $40,500. The gap was $1,200.
This large gap due to the weekend price action is known as the Bitcoin CME gap. Most weekends don't see significant price movements, and so the gaps are minimal. When the price deviates from the CME’s closing price, it's often pulled back to it before the CME opens. In instances where there's a gap, they're filled very quickly.
How to trade the Bitcoin CME gap
You can trade the Bitcoin CME gap by understanding the price difference and predicting the market movements. Here’s one way to trade the Bitcoin CME gap:
Identify the gap: The first step is to watch the Bitcoin markets and CME’s open and close prices during the weekend. Identify gaps that are large enough for you to make a trade.
Predict the gap’s closure: All gaps will eventually get filled. Either Bitcoin’s price goes down to CME’s closing price, or CME’s price catches up with the rest of the market. You, as a trader, will have to analyze how the gap will be closed.
Set the trade: Once the gap is identified and analyzed, you need to set your entry point and type of trade. If you expect Bitcoin’s price to fall, set a short trade. Conversely, if you expect Bitcoin to go up, set a long trade.
Plan an exit strategy: Having a clear plan while entering a trade is important. Plan your exit strategy so you know when to take gains. If you expect the gap to be filled, the exit price should be right at that point.
Set stop losses: We recommend stop losses to manage risks. Trading based on the Bitcoin CME gap is highly speculative and volatile. It's important to set a stop loss to limit potential losses.
Monitor the trade: Keep an eye on the market and your trade. Sometimes, a major news story can invalidate your trade. Even if you have a solid exit strategy and stop loss, be ready to adjust your strategies in response to market conditions.
This trade can be executed on OKX spot market for BTC/USDT, or even on the futures market. You do not need access to CME. You can create strategies and trade them on OKX based on the Bitcoin CME gap.
Advanced tips and considerations
Trading the Bitcoin CME gap isn't just recognizing the gap but having a clear understanding of the broader market. It's also essential to use technical analysis and market sentiment, among other things while trading it. Here are some key factors to keep in mind while trading based on the Bitcoin CME gap:
Leverage with caution Leverage can significantly amplify gains. However, it can do the same for losses, too. Use leverage judiciously, aligning it with your risk tolerance.
Market sentiment analysisStay informed with market trends and trade accordingly. Sometimes, market trends have a bigger impact than any other indicator or technical analysis.
Use technical indicators The Bitcoin CME gap is an opportunity to trade on. However, you can trade it effectively by combining it with other technical indicators. If there’s a heavy resistance, Bitcoin might have a hard time pushing past it even if the gap is upward.
Plan for low liquidity Most traders don't trade on the weekend, meaning there’s often not enough liquidity. A few large trades can easily swing the market. However, they don't always indicate the overall market trend, and the price could easily come back when more liquidity enters the market.
Manage risks, stay flexible, and educate yourself Having a plan and managing the downside is important. At the same time, it’s also important to educate yourself, learn constantly, and stay ready to pivot if necessary.
Analyze historical patterns
Many find it helpful to study how the Bitcoin CME gap closed in the past during major events to gain insights into nuances of the Bitcoin market. Some major examples include the Bitcoin halving and the COVID crash in 2020.
Shortly after Bitcoin halving in May 2020, the price increased during the weekend, creating a CME gap. And, there was a lot of bullish sentiment due to the halving. However, the interest cooled, and the price dropped as a result. Traders who went short on Bitcoin made gains.
Similarly, Bitcoin saw a huge crash during the COVID market crash in March 2020. Bitcoin’s price went from $9,000 to $5,000, creating a huge CME gap. Long-term traders took a long position near the bottom. After trading resumed, it was chaotic. However, Bitcoin’s price went up over the next few weeks, and the gap was eventually filled.
By analyzing historical patterns, traders can better understand market psychology and make better trades.
The final word
The Bitcoin CME gap is an intriguing element of trading, as it only exists at the crossroads of cryptocurrency and conventional futures markets. It presents various possibilities to traders who are interested in more nuanced opportunities. Some view it as a chance to trade, while others use it to gauge market sentiment and make informed decisions for gains.
Whatever your own motivation, we recommend doing your own research before opening positions or making trading decisions based on the Bitcoin CME gap.
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