Consequent Encroachment

The rules

1. The gap: candle 1 wick to candle 3 wick, with candle 2 moving one way through it.
2. The CE: halfway between the gap's high and low, the 50% line.
3. Strong gap: wicks may touch the CE, bodies close on the right side of it.
4. Weak gap: a candle body closes through the CE. Do not trade it.
5. Invalid gap: a body close beyond the far side of the gap.
6. Why CE: a better price than the gap's edge, so the stop is tighter.

How to mark it

1. Find a displacement candle that left a fair value gap.
2. Mark the gap's high and low, then draw the 50% line.
3. Wait for price to come back into the gap.
4. Watch the bodies at the CE: they must hold.
5. Enter at the CE, stop below the gap, target the old high.

The 1:3 trade

Entry at the CE, the 50% of the gap. Stop just below the gap's low. Target the old high. Reward is exactly three times the risk.

Before you enter

• A real fair value gap from displacement
• No body has closed through the CE
• Price wicked into the CE and held
• Stop sits below the gap's low
• Target is a real high, at least three times the risk

Common mistakes

• Buying the top edge of the gap and taking a wider stop
• Still trading a gap after a body closed through its CE
• Treating a wick through the CE like a body close
• Moving the stop inside the gap
• Picking a target with no high behind it

Key terms

• CE: consequent encroachment, the 50% of a fair value gap
• Fair value gap: three-candle imbalance where price traded one way
• Body close: where a candle's body ends, wicks ignored
• Weak gap: a gap whose CE was closed through
• Old high: a prior swing high where buy stops rest
• R:R: reward divided by risk; 1:3 means 3R for 1R risked

Wicks into the CE are fine. A body through it ends the gap.