A Fair Value Gap is a three-candle imbalance where price moved too fast to fill orders. How to identify one on gold, why most FVGs are noise, and how to filter them by volatility.
A Fair Value Gap is a three-candle pattern where the wick of the first candle and the wick of the third never overlap, leaving a band of price that was skipped. In a bullish gap, the high of candle one sits below the low of candle three. In a bearish gap, the low of candle one sits above the high of candle three. The space between is an area where buying and selling never met.
Price moved faster than resting orders could absorb. One side took liquidity aggressively enough that the book could not reprice smoothly, so a stretch of prices got skipped rather than traded through. In volume-profile terms this is the same phenomenon as a low-volume node — the concept predates the terminology by decades.
Treating every gap as significant. On gold at four thousand dollars an ounce with roughly ten dollars of hourly range, a two dollar gap is noise — it will appear several times a session and mean nothing. Using a fixed dollar threshold means your filter is far too loose in fast conditions and far too tight in quiet ones.
Our size floor scales with volatility rather than sitting at a fixed number: gaps smaller than 0.35 times the 14-period ATR on that same timeframe are discarded. We also measure mitigation against later bars instead of assuming a gap stays unfilled, and when several qualify we select the one nearest current price rather than the newest — the newest gap is the front of the move, and entering there is chasing.
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