Trading Liquidity Traps with Fair Value Gap Targets

Summary

This strategy looks for price to sweep a recent swing high or low and then close back inside that level, treating the rejection as a liquidity trap. It requires the candle’s relevant wick to meet a configurable share of its range and applies a cooldown between same-direction signals. A bearish trap triggers a short setup, while a bullish trap triggers a long setup.

The script records three-candle fair value gaps and searches stored gaps for a target: a bearish gap above price for longs or a bullish gap below price for shorts. Stops sit beyond the trap candle with an ATR-based buffer. The document explains the rules and provides source code, but no backtest results or evidence of profitability. Its accompanying notes flag possible overtrading in choppy markets, the absence of a directional or higher-timeframe filter, and ambiguity in choosing the nearest gap; the code’s search order is based on stored sequence and its stated price conditions.

Key ideas

• A trap signal requires a move beyond a recent swing level followed by a close back across it.
• The relevant wick must exceed a configurable fraction of the candle’s full range.
• Bear traps set up longs and bull traps set up shorts, subject to a cooldown.
• Targets come from stored gaps of the opposite direction, while stops use an ATR buffer beyond the trap candle.
• The document supplies no performance evidence and warns that unfiltered signals may overtrade in choppy conditions.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.