How To Trade Fair Value Gaps FVG Trading Strategy ICT 2024

Summary

In this video, the concept of fair value gaps (FVGs) is explained as a powerful tool for improving trading strategies. FVGs are price imbalances on charts that act as magnets, drawing price back to fill them. The video covers how to identify bullish and bearish FVGs, and explains three key levels: IOFed, C, and FVG Fill. Traders can use these gaps for entry points and to set profit targets. By incorporating indicators like Lux Algos on TradingView, traders can automate gap detection and make informed, efficient trades to catch explosive market moves.

Takeaways

• 😀 Fair value gaps are imbalances on a chart that can be used to improve trade entries by identifying price inefficiencies.
• 😀 A bullish fair value gap occurs when the first candle's high does not overlap with the third candle's low, indicating a potential market retracement before trend continuation.
• 😀 A bearish fair value gap happens when the first candle's low does not overlap with the third candle's high, signaling a possible downward market movement.
• 😀 Fair value gaps act as magnets, often drawing the market back to fill the imbalance, which can serve as a target for taking profits.
• 😀 Bullish fair value gaps are referred to as 'Busy' (Buy Side Imbalance with Sell Side Inefficiency), while bearish fair value gaps are 'Sibi' (Sell Side Imbalance with Buy Side Inefficiency).
• 😀 There are three levels of fair value gaps: IO (Institutional Orderflow Entry Drill), C (Consequent Encroachment), and FVG Fill, which help in monitoring price action.
• 😀 IO refers to a price barely reaching a gap before expanding away, best used when there's heavy momentum with large candlesticks.
• 😀 C (Consequent Encroachment) refers to the midpoint of an inefficiency, where price may barely enter the gap before reversing or continue to the midpoint.
• 😀 FVG Fill happens when price retraces and completes the fair value gap, either respecting the level with a rejection or disregarding it entirely.
• 😀 Using trading indicators, such as Lux Algos on TradingView, can help automatically identify and mark fair value gaps, making it easier to trade without manually marking each gap.

Q & A

What is a fair value gap in trading?

A fair value gap is an imbalance on the chart where the market experiences a sudden price movement that creates a gap. For a bullish fair value gap, the first candle's high does not overlap with the third candle's low. The reverse is true for a bearish fair value gap.

How does a fair value gap act as a target for profit?

Fair value gaps act like magnets for the market, drawing the price toward them. This creates a draw on liquidity, and traders can use these gaps as potential targets when taking profit.

What is the difference between a bullish and bearish fair value gap?

A bullish fair value gap (also called a Buy Side Imbalance) occurs when the first candle's high does not overlap with the third candle's low, signaling a potential long position. A bearish fair value gap (Sell Side Imbalance) occurs when the first candle's low does not overlap with the third candle's high, signaling a potential short position.

What are the three levels of fair value gaps and how do they impact trading?

The three levels are: 1) IO (Institutional Orderflow Entry Drill), where price barely enters the gap before expanding away; 2) Consequent Encroachment (C), where price partially fills the gap or reaches the midpoint before reversing; and 3) FVG Fill, where price fully retraces and fills the gap, possibly creating a wick or completely disregarding the gap.

What is the 'Consequent Encroachment' (C) level?

Consequent Encroachment (C) is the midpoint of a fair value gap. When the price returns to the gap, it may not completely fill it but could just enter the area slightly before reversing or continuing to the midpoint before changing direction.

How do you enter a trade using fair value gaps?

To enter a trade, you can wait for price to reach a fair value gap and look for a valid setup, such as a candle closing above the previous swing high for a long position or using a bullish engulfing candlestick. You can set stop losses and profit targets based on the gap's characteristics.

What is the purpose of using different timeframes when analyzing fair value gaps?

Using different timeframes, such as the 15-minute or 5-minute charts, allows traders to zoom in and observe price action more closely to spot retracements to the fair value gap and make more accurate entries after identifying trends.

What tools can be used to automate the process of marking fair value gaps on a chart?

Free indicators on platforms like TradingView, such as Lux Algos, can automatically mark fair value gaps on charts, saving traders from manually identifying and marking each gap.

What is the best way to trade using fair value gaps on a single timeframe?

On a single timeframe, such as the 15-minute chart, a good strategy is to wait for the market to break a swing high, creating a gap, and then trade the first touch of the gap. A stop loss is placed above the fair value gap, and the target can be the swing low.

How can fair value gaps improve trading results?

Fair value gaps improve trading by providing clear entry and exit points based on market imbalances. Traders can use them to identify areas where price is likely to retrace and continue in the prevailing trend, leading to better timing and more profitable trades.