Fair Value Gaps, in the context of financial market analysis within crypto and traditional assets, refer to specific price ranges on a chart where buying or selling pressure was so dominant that prices moved rapidly without significant two-way participation, leaving an imbalance. These gaps represent areas where the market price deviated significantly from what might be considered an efficient, or “fair,” valuation at that moment.
Mechanism
Mechanistically, a fair value gap forms when a candlestick’s high or low does not overlap with the high or low of the preceding or succeeding candlesticks, creating a void in price action. This indicates an impulsive price movement where orders at certain levels were not adequately matched, leading to a temporary inefficiency. Algorithmic trading systems often detect these gaps as potential targets for future price movements, anticipating a return to “fill” these imbalances as liquidity providers seek equilibrium.
Methodology
The strategic approach to fair value gaps in trading involves their use as predictive indicators for potential price reversal or continuation zones. Traders and algorithms often view these gaps as areas the market is likely to revisit to achieve a more balanced price discovery, often referred to as “filling the gap.” This methodology relies on the principle that market inefficiencies tend to correct over time, making these zones critical reference points for entry, exit, or risk management decisions, particularly in volatile crypto markets.
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