Setup: Fair Value Gap
Lesson 37 of 39 in the course “Crypto”. Free, with animations and a quiz.
A Fair Value Gap (FVG) is a zone price rushed through too fast. Look at three candles: the middle one is so strong that the wicks of the first and third do not overlap. The gap between them is the FVG.
Price pulls back toward this zone. It often comes back to fill the gap, but not always. Time to place a limit order, an order at a price you chose in advance.
Where do you place the entry limit order? Answer: Inside the FVG, near the top edge. Answer: inside the FVG. That keeps the stop short, and with the same target you get a better R:R, the ratio of possible profit to risk.
The limit order filled. SL (stop-loss, auto exit at a loss) below the bottom of the FVG. TP (profit target) at the previous high.
The gap is filled and price heads to the target. Cancel: a candle closes below the whole FVG. That means the zone did not work.
Check yourself
- Where is the best entry in an FVG?
Correct answer: Inside the zone, near its edge. Entering inside the zone keeps the stop short. A short stop means a smaller loss if the idea fails. - Where is the SL for a long from an FVG?
Correct answer: Below the bottom of the FVG. If price drops below the zone, the gap did not hold. The idea is dead and the stop limits the loss. - When do we cancel the setup?
Correct answer: A candle closed below the whole FVG. A close below the whole zone means the FVG failed. The setup no longer applies.