What Are Bitcoin CME Gaps and How to Trade Them?

by Feb 22, 2024Technical Terms0 comments

The emergence of Bitcoin as a revolutionary digital asset has captivated the financial world and given rise to a unique phenomenon known as “CME gaps.” These gaps refer to discrepancies in the price of Bitcoin between consecutive trading sessions on the Chicago Mercantile Exchange (CME). In recent years, Bitcoin CME gaps have garnered significant attention from traders, analysts, and enthusiasts, as they present intriguing opportunities and potential indicators for market behavior. In this article, we will delve into Bitcoin CME gaps, exploring their significance, how they occur, and the impact they may have on cryptocurrency markets.

What Is the Chicago Mercantile Exchange (CME)?

The Chicago Mercantile Exchange (CME) is one of the world’s largest and most influential derivatives exchanges. It was founded in 1898 and is headquartered in Chicago, Illinois. The exchange facilitates trading in a variety of financial derivatives, including futures and options contracts.

Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. In the case of CME, the derivatives contracts are primarily based on commodities like agricultural products (e.g., corn, soybeans) and energy resources (e.g., crude oil, natural gas).

Chicago Mercantile Exchange

The CME provides a platform where buyers and sellers can come together to trade these derivative contracts. It acts as an intermediary, or a marketplace, where participants can enter into agreements to buy or sell derivative contracts at specified prices and future dates.

One of the significant advantages of trading derivatives on the CME is the standardized nature of the contracts. CME sets specific contract specifications, including the contract size, expiration date, and settlement terms. This standardization enhances liquidity and makes it easier for participants to buy or sell contracts without the need for customized agreements.

In recent years, the CME has also ventured into the cryptocurrency space. It launched Bitcoin futures contracts in December 2017, becoming the first traditional financial exchange to offer regulated futures contracts on a cryptocurrency. These Bitcoin futures allow market participants to speculate on the future price of Bitcoin without actually owning the underlying cryptocurrency.

By offering regulated and institutional-grade cryptocurrency derivatives, the CME aims to provide a more secure and transparent environment for investors and traders interested in cryptocurrencies. The exchange’s involvement has added credibility and legitimacy to the cryptocurrency market, attracting institutional investors and further integrating digital assets into the traditional financial system.

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What Are Bitcoin CME Gaps?

Bitcoin CME gaps are price differences that occur between the closing price of a Bitcoin futures contract on the Chicago Mercantile Exchange (CME) and the opening price of the next contract.

Bitcoin CME Gaps

Here’s an example to illustrate it:

  • Let’s say the CME Bitcoin futures contract closes at $50,000 on Friday when the CME trading session ends.
  • However, over the weekend, the price of Bitcoin in the cryptocurrency markets (where Bitcoin is directly traded) continues to move and might increase or decrease.
  • When the next CME trading session opens on Monday, the opening price of the new Bitcoin futures contract might be different from the previous closing price, creating a gap.
  • These gaps occur because the CME has specific trading hours, while the cryptocurrency markets operate 24/7. So, while the CME is closed, the price of Bitcoin in the cryptocurrency markets can change.

Some traders believe that when a gap forms, there is a tendency for the price to move back and “fill” the gap by reaching the level of the previous closing or opening price. However, it’s important to note that this is not a guaranteed pattern, and the market can behave unpredictably.

How Does the Bitcoin CME Gap Affect the Price of Bitcoin?

Bitcoin CME gaps are often known for “filling,” which means that the price of Bitcoin tends to move back to the previous closing price. For example, if Bitcoin closes at $20,000 on a Friday and reopens at $18,000 on Monday, many traders expect the price to go up to $20,000 to “fill the gap.”

However, it’s important to understand that this is not a guarantee. It’s more like a probability or tendency, based on past observations. The CME gap is just one indicator among many others that traders use to make decisions.

It’s also important to note that the gap doesn’t have to fill immediately. It can take hours, days, or even weeks for the price to come back to the previous level.

When you’re trading or investing, it’s crucial to consider other factors and indicators along with the CME gap to form a well-rounded strategy.

How to Identify CME Gap?

Let’s consider an example to better understand this concept. The BTC chart presented below depicts the price movement during a specific weekend in January. On the right side of the chart, we observe the price action during that weekend, which results in a noticeable gap between the opening and closing candles. This gap occurs because the price experienced significant movement over the weekend, leading to a higher opening candle on the CME chart (displayed on the left) compared to the closing candle formed on Friday. This phenomenon is commonly referred to as a CME gap.

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How to Identify CME Gap?

These CME gaps often have a tendency to be “filled,” meaning that the market eventually corrects itself and returns to fill the gap. While there may be varying opinions on the exact percentage, most sources agree that at least 65% of CME gaps eventually get filled. In the example mentioned above, this would imply a correction back to $20,000, which has not occurred thus far, resulting in an outstanding gap that may potentially be closed (Do Your Own Research – DYOR).

However, it is worth noting that the cryptocurrency market tends to exhibit stability during weekends when the CME markets are closed, thereby preventing the occurrence of such gaps. This observation also holds true in the example depicted below, where the price of Bitcoin about USD experienced minimal movement during the CME’s closing hours. In fact, a substantial price move paused during this period and resumed as soon as the CME reopened. Essentially, the closing price of CME acts as a magnet, influencing the price to remain relatively stable until the CME markets resume operations. Even if the price manages to deviate from this magnet effect, the market eventually finds its way back to that same level.

Why Do CME Gaps Get Filled?

CME gaps tend to be filled due to the consensus effect among Bitcoin traders. The widespread belief that these gaps will eventually be closed influences trading decisions and impacts the overall market price movement. This collective expectation and trading behavior contribute to the fulfillment of CME gaps as predicted. However, it is important to recognize that this perspective may evolve over time as Bitcoin further establishes itself as a mature asset class. As the cryptocurrency market evolves and gains more stability, the dynamics surrounding CME gaps and their filling may undergo changes.

How to Make Money with the Bitcoin CME Gap

When it comes to CME’s Bitcoin prices, there can be instances where the closing price is higher than the opening price after a weekend. In such cases, there is usually an expectation that the spot price will rise to fill the CME gap that was created. Conversely, if the opening price after the weekend is higher than the Friday closing price, there is a high likelihood that the spot price will correct within 24 hours after the market reopens.

CME Gap

This knowledge can be utilized to make informed trading decisions aimed at maximizing profitability. For instance, let’s consider a scenario where a common gap appears on a price chart, and BTC CME closed at $46,000 while opening at $43,700. By recognizing the type of gap and understanding that prices are likely to increase to fill the gap, you can predict the potential outcome and base your trading decisions accordingly.

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Moreover, when encountering a breakaway gap, it indicates that the conclusion of a price pattern is approaching. Depending on the specific pattern observed, you can anticipate future developments and adjust your trading strategy accordingly. This understanding of gap types and their implications can assist in making more informed and profitable trading choices.

How To Trade Bitcoin CME Gap?

Due to the high probability of eventual CME gap filling, some cryptocurrency traders prefer to initiate positions when the price deviates from the CME closing price. In the example mentioned earlier, when BTC displayed indications of reaching a bottom, traders could open a long position to reach the CME closing price indicated by the black line.

This strategy tends to be effective during periods of sideways market movement but becomes less advantageous when the market enters a trend. In trending markets, CME traders often miss out on opportunities, leading to more frequent instances of unfilled CME gaps.

Similar to other trading systems, it is crucial to combine entry trades based on the CME gap with other forms of analysis. Relying solely on the gap is unlikely to result in positive returns. For instance, when an RSI (Relative Strength Index) divergence emerges, one could consider entering a trade with the target of filling the CME gap.

Additionally, some traders use this statistical trend as a reason to abstain from trading on weekends, as prices tend to remain relatively stable during that time, offering fewer trading opportunities.

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Conclusion

In conclusion, Bitcoin CME gaps offer valuable insights into market behavior, but they should not be relied upon as the sole basis for trading decisions. To develop a comprehensive trading strategy, it is important to consider Bitcoin CME gaps in conjunction with other indicators and factors. By incorporating a diverse range of tools and analysis methods, traders can enhance their understanding of the market and make more informed trading decisions. The study of Bitcoin CME gaps can serve as a valuable component of a larger trading framework, enabling traders to navigate the cryptocurrency market with greater confidence and effectiveness.

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