Below is a deeper walk-through of exactly what you’re doing, how the market’s plumbing responds, and why your rules line up with real, observable mechanics. I’ll keep it step-by-step and jargon-light, but drill into the nitty-gritty of order-book dynamics, quote behaviour and execution logic.
1. Trend Filter and Why It Matters
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Session SMA (24 bars)
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You calculate a simple moving average over the last 24 five-minute bars. That gives you the “fair value” anchor for the morning session.
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Above SMA = buying environment: more participants aggressively bidding, fewer willing sellers.
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Below SMA = selling environment: more participants aggressively offering, fewer willing buyers.
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Why follow it?
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If you buy above the SMA you’re trading with the bulk of aggressive orders, not against them.
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Statistically, retracements in the direction of the larger move tend to resume more often than blunt reversals.
2. Three-Candle Gap Formation in Detail
You watch for three consecutive candles moving the same way, leaving a clean “void” in between. Here’s how each unfolds in the order book:
| Candle | What Traders Do | Order-Book Result |
|---|---|---|
| 1 | Big batch of market orders (buys or sells) | Eats through resting limit orders at that wick level, clearing liquidity. |
| 2 | Follow-through market orders | Pushes price into fresh territory, removing even more resting orders. |
| 3 | Another wave of aggressive orders, but no retrace | Leaves no pull-back wick to refill that zone, so no new limit orders queued there. |
- On your chart, that “gap” between Candle 1’s wick and Candle 3’s pull-back wick is a literal hole in displayed liquidity.
- There is no price congestion zone there: no big piles of bids (for a buy setup) or asks (for a sell setup).
3. Order-Book Snapshot Example
Imagine you had these bids/asks before Candle 3 closed (simplified):
| Price | Bid Size | Ask Size |
|---|---|---|
| 15 850 | 100 | 50 |
| 15 845 | — | — |
| 15 840 | 200 | 150 |
- At 15 845 there are zero resting orders: that’s your gap.
- Market-makers or liquidity-adders will eventually refill 15 845 once the storm passes, but until then it sits empty.
4. Placing Your Limit at Candle 3’s Open
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Why the open?
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It’s the first traded price after the void was created.
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Many algos peg offsets to the most recent open price, so quoting clusters there.
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Passive vs aggressive
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By using a limit you add liquidity at a precise point, rather than crossing the spread with a market order.
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You join the queue for that price, so you only get filled if someone else aggressively takes your order.
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Fill conditions
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A pull-back into the gap usually happens because initial buyers (or sellers) pause or lock in profits.
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When they place market-contra orders, they hit your limit.
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Cancel on Bar 4
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If no one returns to that gap on the next five-minute bar, you remove your order.
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That prevents you being “stranded” in a low-momentum setup.
5. Risk, Costs and Reward
- Stop Loss: 7.5 points below (for buys) or above (for sells) your entry, plus about 1.8 points average spread and 0.2 points slippage (≈9.5 points total).
- Target: at least 30 points, aiming for 4 times what you risk.
- Fill Probability: you need roughly one fill per four attempts to hit your target RRR over time. Because your SL accounts for spread and slippage before you place the order, you never understate true risk. Likewise, your target of 30 points lives well beyond ordinary noise.
6. Why This Isn’t “Stop-Hunting Theory”
- You’re watching actual order-book states: seeing liquidity vanish and reappear.
- Your entry is pegged to a hard reference (Candle 3 open), not some vague “stop-cluster” zone.
- You trade with broad market aggression (via the SMA filter), not against it.
7. Real-World Execution Flow
- 08:00–10:00 UK time: session builds momentum.
- Identify 3-candle gap: watch the book or Level-II data, confirm the void.
- Place limit at open of Candle 3.
- Monitor Candle 4: hit? you’re in. no hit? cancel, reset.
- If filled: move SL to break-even (once you’ve got 7.5 points), trail or hold for 30 points.
- Exit: either your SL or target fires, capturing a clear 4 to 1 payoff or cutting losses quickly.