Plenty of people find fair value gaps convincing on a handful of well-chosen charts. That is not evidence. This lesson shows how to turn an idea into something you can measure.
1. Write the rules first
Before you look at any results, define in writing:
- What makes a valid gap (size threshold, timeframe, direction).
- Which context filter applies (for example "only in the direction of the daily trend").
- Exactly what triggers an entry (for example "price enters the zone and a candle closes back out of it").
- Where the stop goes and how the target is set.
If a rule is vague, two people will mark different trades on the same chart, and the test is meaningless.
2. Test on data you did not use to design the rules
If you adjust the rules until they look good on one stretch of history, you have described that stretch, not a pattern. Keep a separate period untouched, and run the final rules on it once.
3. Include costs
Spread, commission and slippage reduce every result. A pattern that makes a small profit before costs can lose after them.
4. Count enough trades
A few dozen trades is a bare minimum before you take the result seriously, and even then the range of plausible outcomes is wide. A good run of ten trades is almost meaningless.
5. Record R multiples and drawdown
Measure each trade in R, and the deepest peak-to-trough fall in your results. A strategy that is profitable but has a drawdown you could not tolerate is not a strategy you can trade.