The Fair Value Gap Strategy: a rebound champion
The fair value gap
The fair value gap is literally a gap in the market price. Aggressive buying causes the market to rise rapidly. During these rapid rises, there is often little or no trading at certain price levels. This zone where there is little trading is the fair value gap zone. If the price falls again sufficiently within the fair value zone, this can lead to a second wave of buying.
This example shows a fair value gap zone. The zone is calculated based on the top of the candle before the sharp rise and the bottom of the candle after it. A fair value gap can, of course, also occur in a falling market.
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If the price falls back into the fair value gap and quickly rises again due to a buying wave, a buy signal is generated. These are the criteria:
- The price decline must cover at least half of the fair value zone.
- The rise out of the zone must be immediate, i.e. in the first candle after the decline.
A buy signal
In a rising market, the price falls back within the fair value gap zone (1). A wave of buying immediately pushes the price back above the zone (2) on the next candlestick. The market continues to rise. The trader closes with a profit (3).
A short sell signal
In a falling market, the price rises within the fair value gap zone (1). A wave of selling immediately pushes the price back below the zone (2). The market then falls rapidly and the trader can exit with a profit (3).
Closing positions
The Fair Value Gap strategy has a price target for taking profits and a stop loss.
- The price target is based on market volatility. Volatility is measured by the ATR (average true range). The price target is set at a number of times the ATR.
- To limit losses, the PeriodsHighLow stop is used. This popular stop moves with the market. This also secures the profit. The stop is calculated over a period of 15 candles.
In this example, the price target is reached. Note that the price has already fallen within the fair value gap for the first time. A buying wave occurs, as indicated by the large green candle. The strategy does not respond because the buying wave does not start immediately, but only after the second red candle in the zone.
In this example, the price target is achieved. Note that the PeriodsHighLow stop loss follows the market down. At the end, the stop loss is already below the entry point. This profit can never be lost.
Implement this free trading strategy
Follow these steps in the NanoTrader Full platform:
1. Open the chart of the instrument you want to trade.
2. Select the strategy in the "WHS Strategies" folder.
3. Activate "TradeGuard+AutoOrder" in the chart to trade semi-automatically or "AutoOrder" to trade automatically.
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