Fair value gaps: the ones that matter and the ones that do not

[Shadow Trader]

Three candles, a gap between the wick of the first and the wick of the third. It shows up constantly, so it cannot all be meaningful. I filter fair value gaps by three questions. Did it form during displacement, with a candle that broke structure? Is it located in the right half of the range, discount for longs and premium for shorts? And has it already been partially filled? Gaps that form in the middle of choppy consolidation are noise. Gaps that form in a strong impulse leg tend to get revisited, and sometimes respected on the first touch. I also watch size relative to the average true range. A gap smaller than a fraction of ATR is not worth trading. The most useful way to use a gap is as a confluence with an order block or a sweep, not as a signal alone. One tool on its own is a coin flip. Two or three aligned conditions start to resemble an edge.

[FXS HongKong Scalper]

Sizing the gap relative to ATR is the filter that helped me most. On USDJPY M5 during Tokyo, gaps under about a quarter of ATR were essentially noise and filled without any reaction. The ones that formed in the first hour after the Tokyo open on a real impulse were far more likely to get a reaction on the first revisit. Do you treat a gap that has been filled halfway as still valid, or is it done for you once price trades through the midpoint?