Fair Value Gap Strategy

Fair Value Gap Trading Strategy Cheat Sheet for fluid trades Traders

Understanding Fair Value Gaps

• A Fair Value Gap (FVG) as it’s often referred to, is basically a gap that forms when the buying and selling forces are wildly out of balance.

• What causes this mismatch? Well, it could be a ton of things – a major news event, the release of certain economic data, or even hefty trades by big institutions.

• Gaps can be up (bullish) or down (bearish).

Entry Strategies

• Buy Gaps (Bullish):

  • Look for stocks gapping up on bullish impulsive movements.

  • Consider buying near the open or on a pullback towards the gap area.

Sell Gaps (Bearish):

• Look for stocks gapping down on negative news.

• Consider selling short near the open or on a bounce towards the gap area.

Exit Strategies

• Set a target profit level (e.g., 1-2 times the risk) and exit at least a portion of your position.

• Use a stop-loss order to limit potential losses (e.g., below the gap area for long trades, above the gap area for short trades).

Risk Management

• Start with small position sizes (e.g., 0.5-1% of your account per trade).

• Use stop-loss orders to protect against reversals.

Additional Considerations

• Monitor the stock's behavior and overall market sentiment throughout the day.

• Be aware of potential "gap fade" or "gap fill" scenarios, where the stock may reverse back towards the previous day's close.

• Consider using the fluid flow indicator to confirm the trend and identify potential entry/exit points.

Remember, trading involves risk, and it's essential to practice with a paper trading account before risking real capital. Always start small and gradually increase your position sizes as you gain experience and confidence in your trading strategy.