Partial fills of the fair value gap on EURUSD M5, where I take profit and where I'm wrong

[Fairman]

Partial fills of the fair value gap on EURUSD M5, where I take profit and where I'm wrong

fair value gaps get overcomplicated. On M5 I look for a strong displacement candle that leaves a gap between the first candle's high and the third candle's low, in the direction of the higher timeframe bias. Then I wait for price to pull back into it.

diagram.png (37.44 KiB) Viewed 24 times

I don't need a full fill. For me the midpoint of the gap is the key spot. If price comes back to about halfway into the gap and a candle closes back in the direction of the move, that's my entry. Stop goes below the whole gap, so if price closes fully through it the idea is wrong and I'm out. Target is the swing high that preceded the pullback.

What I skip: gaps that formed in a quiet period with no real momentum behind them. If the displacement was just a couple of pips, it isn't a gap that anyone cares about. I only want gaps created by a strong move, usually around the London open or a data release. Also anything formed against the M15 trend gets ignored, those fill and keep going.

[Fairman]

Someone asked how I measure the midpoint without guessing. I literally draw a box from the high of the first candle to the low of the third candle, then put a horizontal line at fifty percent. TradingView has a midline option on the rectangle tool which saves doing the maths. I am not precious about price touching it exactly. If a candle wicks within a pip or so of the line and then closes back up, I treat that as the reaction I wanted. Waiting for a perfect tag usually means missing the move completely.

[Fairman]

On the stop, a lot of people put it right under the gap and get taken out by one wick. What I do is look at where the displacement candle started and keep the stop just under the bottom of the gap with a little extra for spread. If the M5 candle closes below the whole gap, I am out even if the stop has not been hit yet. A close through means the move that created the gap has been fully given back, and I do not want to sit there hoping.

[Fairman]

When the gap gets filled completely and price keeps going, I do not look at it again for a long time. It has done its job and the idea is finished. Sometimes it flips and acts as resistance on the way back up, which is the inverse gap idea, but that is a separate trade with its own rules and I do not want to mix the two. Keeping it to one clear plan per gap stops me from inventing new reasons to stay in something that has already failed.