Understanding Fair Value Gaps in Trading

Introduction to Fair Value Gaps

• Trend: Fair value gaps are a significant trend in trading because of their effectiveness.
• Valid vs Invalid Gaps: Not all fair value gaps work; some are valid, some are not.
• Technique: There's a secret technique to identify valid fair value gaps which enhances their accuracy.

What is a Fair Value Gap?

• Definition: It occurs when the price moves dramatically up or down, creating an imbalance.
• Types: Bullish (upward) and bearish (downward) fair value gaps.
• Market Imbalance: Such gaps occur because sellers don't have time to counteract the price movement.
• Marking a Fair Value Gap:
  • Mark from the top wick before the big move to the lower wick after.
  • Price often retraces to fill this gap, providing a trading opportunity.

Validating Fair Value Gaps

• Ineffectiveness: Not effective 100% of the time due to invalid gaps.
• Six Key Factors for Validity:
  1. Unmitigated Gap: The gap must not have been tested or retested.
  2. Candle Reaction: Candles should close within or in the direction of the gap.
  3. Confluences: Use support and resistance to strengthen the gap.
  4. Priority: Lower gaps have higher priority; higher gaps are weaker.
  5. Gann Box Tool: Use this tool to identify high-priority gaps by setting price levels at 0, 0.5, and 1.
  6. Break of Structure: There should be a break of structure before gap formation.

Detailed Explanation of Factors

• Unmitigated Gaps: Price should not return to test the gap after formation.
• Candle Closures:
  • Valid: Candle closes inside the gap or in its direction.
  • Invalid: Candle closes outside of the gap.
• Support and Resistance: Coinciding support/resistance strengthens gap validity.
• Priority Gaps:
  • Bullish: Trade the lowest gaps.
  • Bearish: Trade the highest gaps.
• Gann Box Tool:
  • Use to mark moves and identify trade-worthy gaps.
  • Only trade gaps in the lower portion (upper for shorts).
• Break of Structure:
  • Bullish: Needs to break the previous high.
  • Bearish: Needs to break the previous low.
  • Ensures the gap is formed under market conditions conducive for reversal.

Practical Example

• Process:
  1. Identify break of structure points.
  2. Wait for a fair value gap to form.
  3. Ensure it is unmitigated and mark priority gaps.
  4. Use the Gann box tool for clarity.
  5. Verify confluences such as support within the gap.
  6. Confirm candle closure within or above the gap.
• Outcome: Following these steps should lead to a profitable trade once all criteria are met.

Conclusion

• Recommendation: Combine all six factors to improve fair value gap trades.
• Additional Resource: Invitation to join an email list for trade analysis and tips, free of charge.