Fair Value Gap Trading: 5 Ways to Find High-Quality Setups

For the first time. For example, if you see a fair value gap that forms,

but you

also notice that the price has already retested it, then it's no longer an

effective fair value gap. Another important thing to note is

that the price

shouldn't retrace too deeply to the point where it closes below the gap.

If it does, then the fair value gap is also invalidated.

So the best fair value gap entry is when the price hasn't retested it before.

And when it does retest for the first time, make sure it doesn't break below the

gap.

Number two, whenever you spot multiple fair value gaps

on one setup, such as this

example, always prefer the ones with large size.

Larger fair value gaps, such as this one, almost always work better compared to

smaller ones because they represent a stronger imbalance between buyers and

sellers. This means they are more likely to act as stronger areas

of support or

resistance. Moving on to number three.

If you found a setup with multiple fair value gaps that are about the same size

and

none stand out as significantly larger, you'll need to filter them out based on

their position. The ones you use are the fair value gaps located in the

lower

portion of the move, which usually has a higher chance of

working.

But to do this more precisely, you'll need a tool.

On a charting platform like TradingView, you can use the Gann Box tool.

You then go to Settings and set the price levels to zero,

zero point five, and one.

To use the tool, you drag it from the swing low to the

swing high of the movement

that contains multiple fair value gaps.

This line in the middle separates the fair value gaps, and you should only focus on

the gaps located on the bottom area and ignore the ones on the upper area.

Same thing for shorts. Drag the tool from the swing high to the

swing low, and only

focus on the gaps located on the top area.

Number four, a type of setup you should absolutely

avoid is when a fair value gap

forms as the price approaches a major key level.

For example, let's say you spot a bullish fair value

gap forming.

But when you look back, you notice that there's a major resistance level

above, so

it's best to ignore this fair value gap.

This is because key levels could cause the price to be rejected and reverse from

them, which may invalidate our initial fair

value gap.

Moving on to number five. Fair value gaps that form after a break of

structure are

gold. If you manage to spot these types of fair

value gap, they have one of the

highest win rates compared to other setups.

To recap, here's a quick explanation of what a break

of structure is.

During an uptrend, whenever the price breaks a previous high,

that's called a break

of structure. A previous high refers to the highest

price point reached before the

price pulls back or retraces. Let's say price moves up,

then dips slightly before

moving up again. This peak before the dip

is called the previous high.

So when the price moves above this high, making new highs, it's called a break of

structure.

Similarly, during a downtrend, if the price breaks below the previous

low, that's

also a break of structure. And so to circle back to our topic,

when a fair value

gap forms near and after a break of structure like this one,

it signals a high win

rate setup. In such cases, the price has a higher likelihood of

retracing to this

gap and bouncing from it.

So now that you've learned the five hacks to spot high-quality fair value gaps, let

me share the best entry technique for trading them once you've identified one.

The best entry point when trading a fair value gap

is to enter a trade right in the

middle of the gap. To do that, we use the same Gann Fan tool from

earlier, drag it

from the low of the fair value gap to the high of the fair value gap.

And so this middle point will be our entry.

Next, you wait for the price to retrace to the

midpoint.

Once it does, you're good to enter the trade,

so you open a buy position.

And as for your stop loss, set it at the break of the fair value gap

or the point

of invalidation. Now, I wanna share the three advanced

strategies using the fair

value gaps that I use to get consistent profits.

Now let's move on to advanced strategy number one.

The first strategy is called inversion gap, which

is a type of fair value gap that

has been previously broken. Now, just because a fair value gap has been

broken once

doesn't mean it's no longer useful.

In fact, you can utilize it one more time as an

inversion gap, as there's a

possibility that price could reject the level once more on its next move.

Here's how you can apply this strategy.

The first step is to look for a fair value gap that has been broken.

This means the price has already moved through it once.

In this case, we see this bullish fair value gap that's

been broken.

Next, wait for a retracement back towards

that gap.

This broken fair value gap now acts as a resistance level.

Once it retraces, take a position opposite to the original

direction of the fair

value gap. If it was a bullish fair value gap,

open a short position.

Now, manage your risk by placing your stop loss

just above the fair value gap and

aim for a take profit level at twice the distance of your stop loss.

As the price reverses and hits your profit target,

you secured a nice profit.

Important note to remember, inversion gaps typically only work once.

So if the price crosses the fair value gap multiple times, the setup loses its

validity. Advanced strategy number two.

In this strategy, we're using fair value gaps in combination

with the Fibonacci

retracement tool.

If you don't already know, Fibonacci retracement

is a popular tool that uses

horizontal lines to show areas of potential support or resistance.

In this strategy, the sixty-one point eight percent level on

the Fibonacci tool,

also known as the golden zone, is particularly important.

So to combine fair value gaps with the Fibonacci retracement, we're using

confluence between them. First, you'll want to identify all the fair value

gaps

that exist on a setup. Once you've marked these gaps,

use the Fibonacci retracement

tool. Apply it from the low to the high of the

movement that has multiple fair

value gaps. Next, focus on the fair value gap that's closest

to the sixty-one point

eight percent Fibonacci level. So this is the gap that we're interested in.

Next, just wait for the price to retrace

that gap.

Once it does, make sure the candle still closes within

or above it, such as in this

example. Once our entry criteria are met, you can enter a buy position.

Then place a stop loss below the fair value gap and set your take profit target

at

two times stop loss. As you can see, price bounced off the fair value gap,

giving

us a good profit. Advanced strategy number three.

In this strategy, we're combining fair value gap trading

with multi-time frame

confirmation. First, start by choosing a time frame,

preferably higher time frames

like the four-hour chart. Next, identify the long-term trend using the two

hundred

period EMA indicator. The EMA helps to ensure

that we're trading in the same

direction of the long-term trend.

If the price is above the EMA, you only look for bullish fair value gaps.

If the price is below, you only look for bearish fair value gaps.

In this example, the trend is bearish, so we'll look for bearish fair value gaps.

We find one right here, a large red candle with a gap between two

smaller candles.

Since the price hasn't retested it yet, it's still unmitigated, making it a

potential setup.

Next, we wait for the price to retrace to the

fair value gap.

Once it does, we prepare for entry.

Now, relying solely on the midline of the fair

value gap for entry can sometimes be

insufficient, as price may reverse from the gap before

reaching it.

So we use another confirmation method, multi-time frame analysis.

We zoom into a smaller time frame, like the one-hour chart.

Here we use a momentum indicator like the MACD to help for confirmation, so we wait

for it to cross downwards. Once it does, we can take a short position.

Next, place your stop loss at the invalidation

point of the fair value gap and set

your take profit at twice the size of your stop loss.

As you can see, this trade ends up being profitable.

Now here's a quick guide on which time frames to choose for multi-time

frame

confirmation.

So as you can see, trading the fair value gaps can be very

profitable.