I Found A Secret To Fair Value Gaps

Introduction

This tutorial will guide you through the concept of fair value gaps (FVGs) in trading and provide six techniques to identify valid gaps. Understanding how to differentiate between valid and invalid fair value gaps can enhance your trading strategy and improve your success rate.

Step 1: Understand Fair Value Gaps

• Definition: A fair value gap occurs when the price moves significantly in one direction, creating a large candle that indicates an imbalance in the market.
• Types: There are two types of fair value gaps:
  • Bullish Fair Value Gaps: Created when the price surges upward quickly.
  • Bearish Fair Value Gaps: Created when the price drops swiftly.

Step 2: Identify Valid Fair Value Gaps

To ensure you're trading valid fair value gaps, consider the following six key factors:

Factor 1: Unmitigated Gaps

• A fair value gap must not have been tested after its creation. If the price revisits the gap, it is considered invalid.
• Example: If price returns to the gap and then continues to rise, that gap is no longer valid.

Factor 2: Candle Reaction

• Check how the candles behave within the fair value gap:
  • The candle should either close inside the gap or in the direction of the gap.
  • Invalid Scenario: A candle that closes below the gap makes it invalid.
  • Valid Scenario: A candle that closes within the gap or above it is a good entry point.

Factor 3: Use Confluences

• Enhance the strength of your fair value gaps by identifying additional support and resistance levels.
  • Look for support in bullish gaps and resistance in bearish gaps that align with the fair value gap.
  • This dual confirmation increases the likelihood of a successful trade.

Factor 4: Prioritize Gaps by Location

• Not all gaps are equal; prioritize them based on their position on the chart.
  • The lowest bullish fair value gap has the highest priority, while the highest bearish gap has the highest priority.
• Focus on trading gaps at lower levels for bullish trades and higher levels for bearish trades.

Factor 5: Utilize the Gann Box Tool

• Use the Gann Box tool to visually assess fair value gaps:
  • Set price levels to 0, 0.5, and 1.
  • Mark from the low to the high of the move. Only consider trading gaps in the lower portion for bullish trades and in the upper portion for bearish trades.

Factor 6: Ensure Break of Structure

• A valid fair value gap should follow a break of structure:
  • For bullish gaps, ensure the price breaks the previous high.
  • For bearish gaps, ensure the price breaks the previous low.

Step 3: Execute a Trade

• After validating a fair value gap:
  • Set your take profit at the high of the move and your stop loss at the low of the candle that created the gap.
  • Monitor the price action as it approaches the gap zone to confirm your entry.

Conclusion

By understanding and applying these six techniques, you'll be able to identify and trade valid fair value gaps more effectively. Regularly practice these methods to refine your trading strategy and increase your chances of success. Consider subscribing to market analysis newsletters or joining trading communities for further insights and support. Happy trading!