FVGs Tell You Everything

Summary

This video provides a step-by-step trading strategy using fair value gaps to guide market decisions. It outlines six key steps: defining the bias (market direction), building a narrative (the story behind the price move), identifying context (entry points), making the entry (using sharp turn strategies), managing risk, and mastering the concept. The focus is on using fair value gaps to predict price action, with an emphasis on time frame alignment, risk management, and understanding liquidity draws. By mastering fair value gaps, traders can enhance consistency and profitability in their trading approach.

Takeaways

• 😀 Fair Value Gaps (FVGs) are powerful tools in trading that act as both magnets and rockets, pulling or pushing price action depending on the market structure.
• 😀 The trading strategy is built around six key steps: defining bias, creating a narrative, establishing context, finding entry points, implementing risk management, and defining targets.
• 😀 The market bias determines whether the price is likely to go higher or lower, based on liquidity drawn to specific FVG levels.
• 😀 A **bias** is simply the market's direction, which can be defined by looking at liquidity drawn to FVGs on higher timeframes like the monthly and weekly charts.
• 😀 **Fair Value Gaps** are identified as areas where price moves too quickly, and price action will often retrace back to fill these gaps before continuing in the direction of the trend.
• 😀 Higher timeframes (monthly, weekly) offer stronger FVGs compared to lower timeframes (daily, 4-hour), making them crucial for determining market bias and targets.
• 😀 The **narrative** is the story behind how price will move to and from a FVG, and it’s vital to confirm this story by checking lower timeframes for price action clues.
• 😀 **Context** is the area around the FVG where an entry can be made, often identified by swing points (swing highs and swing lows) that help define the boundary for entries.
• 😀 An **entry strategy** involves confirming the FVG setup with lower timeframes (e.g., 4H, 15-minute), looking for sharp turns or price reversals as confirmation of the trade direction.
• 😀 Risk management is essential for ensuring trades are well-protected; use stop losses at swing lows and take profits at reasonable targets, such as opposing FVGs or key price levels.
• 😀 It's important to focus on **low risk-to-reward ratios** when starting out, aiming for a 1:2 risk-to-reward ratio, and gradually increasing targets as experience grows.
• 😀 Fair Value Gaps offer a minimalist approach to trading: master FVGs, and everything else (bias, narrative, context, entries, and exits) will naturally follow.

Q & A

What is a fair value gap (FVG) in trading?

A fair value gap (FVG) is a price gap that forms when price moves too quickly in one direction, leaving a gap between two candles. This gap can act as either a magnet, attracting price back into it, or a rocket, repelling price and pushing it further away from the gap.

How does a fair value gap help define market bias?

Fair value gaps help determine market bias by indicating potential liquidity draws. A liquidity draw is a price level where price is likely to head next, which can be identified through FVGs. If an FVG is present on higher timeframes (e.g., monthly or weekly), it helps signal the overall market direction, either bullish or bearish.

What is the role of timeframes when analyzing fair value gaps?

Higher timeframes, such as the monthly and weekly, provide stronger and more reliable fair value gaps that indicate broader market trends. Lower timeframes (e.g., daily or 4-hour) offer more specific, short-term signals and can be used for refining entries and confirming the market’s direction.

Why is understanding liquidity draw important when using fair value gaps?

A liquidity draw indicates where price is likely to move next. By identifying these draws through fair value gaps, traders can predict potential price targets or reversals. It is important to understand this because it helps set the direction for subsequent trades and allows for better risk management.

What does it mean when a fair value gap acts as both a magnet and a rocket?

When a fair value gap acts as a magnet, it attracts price back towards it, drawing the market into the gap. Conversely, when it acts as a rocket, the gap repels price, pushing it away toward other areas of liquidity. This dual nature of FVGs is essential for understanding price behavior and predicting future movements.

How do you identify the narrative when using fair value gaps?

The narrative is the story behind how the price will move towards a target. To identify the narrative, you analyze lower timeframes to find FVGs that will drive price toward the main liquidity draw (usually a higher timeframe FVG). The narrative helps define where the price may retrace or continue based on market conditions.

What is the significance of using 'swing points' in trading?

Swing points are significant price levels, such as swing highs or lows, that help define potential entry or exit points. In the context of fair value gaps, these swing points often serve as targets or areas to place stop-loss orders. Identifying swing points is important for refining the trading strategy and determining key levels of market movement.

How can time frame alignment influence trading decisions?

Timeframe alignment refers to using multiple timeframes to confirm the strength of a trend or signal. For example, if a monthly or weekly FVG indicates a bullish bias, lower timeframes (like daily or 4-hour) can help confirm short-term trends. Proper alignment ensures that traders act on stronger signals and avoid counter-trend trades.

What is the purpose of using sharp turn entries, and how are they executed?

Sharp turn entries are used when price reaches a fair value gap and then makes a significant reversal (sharp turn) in the opposite direction. These entries are executed by confirming the reversal on a lower timeframe (e.g., 15-minute chart) after identifying the larger FVG on a higher timeframe. This technique allows traders to capitalize on short-term reversals within the broader trend.

Why is risk management important in trading, and how should stop-loss levels be set?

Risk management is crucial in trading to protect capital and ensure long-term profitability. Stop-loss levels should be set at key price levels, such as swing lows for bullish trades or swing highs for bearish trades. Proper risk management also includes adjusting stop-loss to break even once the trade moves in your favor, ensuring minimal losses if the market reverses unexpectedly.