Fair value gaps explained, and how to write them as a condition
When price moves fast enough, one candle's range does not overlap the candle two before it, and a stretch of price is left that nothing traded through. That stretch is a fair value gap. This guide is how the app finds one, how long it keeps watching it, and the five things it can say about price coming back to it.
What it is
Take any three consecutive candles. If the first candle's high is below the third candle's low, the middle candle moved so far that the space between those two levels was never traded in either direction. That space is a bullish fair value gap: it sits below the current price, left behind by a move up. The mirror — the first candle's low above the third's high — is a bearish gap, sitting above price after a move down.
The idea behind watching one is that price tends to come back to the areas it skipped. Whether it does on your market is a testable claim and not something this guide asserts; what the app does is find the gap, keep it on the chart, and tell you when price interacts with it.
The settings
- Gap direction. Bullish (the gap is below price) or bearish (above). A condition watches one kind.
- Minimum gap size, in ATR. Gaps smaller than this fraction of the average true range are ignored — 0.25 by default. Without a floor, quiet markets produce tiny gaps on most bars and the condition fires constantly.
- Ignore gaps older than. How many bars the app keeps tracking a gap that price has not returned to, fifty by default. After that it is dropped unfilled.
- A gap is filled when price… touches it, reaches its midpoint, or crosses it completely. "Filled" is when the app stops tracking it; the default is a full cross.
Writing it as a condition
These are the comparisons SixOne8 offers, in the builder's own words. All but one are moments.
- Gap forms. A gap in the chosen direction, at least the minimum size, formed on the bar that just closed. True only on that bar.
- Price enters the gap. The bar traded into the gap and the bar before it had not. A wick into it counts; the bar does not have to close inside. True only on the bar of arrival.
- Price inside the gap. The bar closed between the gap's edges. A state, true for as long as closes stay inside.
- Price rejects the gap. The bar traded into the gap and closed back out on the side it came from — above a gap below price, below a gap above it. True only on that bar. This is the condition most strategies built on gaps are looking for.
- Price closes through the gap. The bar closed beyond the gap's far edge. Judged on the close, so a wick through does not count. The gap did not hold.
Fair Value Gap(bullish, 0.25 ATR) on 15m · price rejects the gap
Read it as a sentence: on the 15-minute chart, price dipped into a gap left by an earlier move up and closed back above it. That is what the scanner evaluates at each 15-minute close.
Inverse gaps
A separate indicator, Inverse Fair Value Gap, watches a gap after price has closed through it — the idea being that a bullish gap that failed may act as the opposite kind of level from then on. It has the same five comparisons, and "gap forms" for it is the bar price closed through the original gap. It is listed separately because it is a different event, not a setting on this one.
Before you trust it
Run an entry check. It will tell you whether, on the market you care about, the moments this condition fired moved any differently from a random moment over the history tested. That is a fact about the past on that market, and it is the only kind of fact a test here produces.