Arjo's "Fair Value Gap" Theory

Summary

The video script delves into the concept of fair value gaps in the market, explaining how they can predict market movements. It emphasizes the importance of the third candle in a three-candle pattern to identify breakaway gaps, which are unlikely to be retraced before reaching a certain level. The script also discusses how understanding fair value and market structure can help traders capitalize on these gaps for short-term gains. It suggests that by recognizing where the market has offered fair value and where it hasn't, traders can determine which gaps are most likely to be respected or traded into, both in the short and long term.

Takeaways

• 📈 Fair value gaps are crucial in understanding market movements and can predict which gaps will be traded back into.
• 🔍 To analyze fair value gaps, focus on the third candle of a three-candle pattern, as it indicates whether the gap is a breakaway gap or not.
• 🟢 Green fair value gaps represent normal gaps expected to be retraced into in the short term, while red ones indicate breakaway gaps that won't be traded back into before reaching a certain draw on liquidity.
• 📊 The third candle's behavior (closing above the previous candle's high) is a general rule of thumb to determine if a gap is a breakaway gap.
• 📉 Understanding breakaway gaps is essential for capitalizing on market opportunities, as they represent a high probability of not trading back into the gap in the short term.
• ⏳ Time is a critical factor in determining which fair value gaps to trade into, as it affects the likelihood of retracement.
• 🔄 The market structure and the concept of fair value suggest that gaps above intermediate-term highs are the areas where fair value has not been offered yet.
• 🎯 When trading, consider the overlapping of highs with fair value gaps to identify the most relevant gaps for potential market moves.
• 📝 Fair value is about offering a balanced opportunity for both buyers and sellers, and understanding this can help predict market behavior.
• 🚀 Adding time to the analysis of fair value gaps can enhance the accuracy of predicting market movements and potential trading opportunities.

Q & A

What is the main theory discussed in the transcript?

The main theory discussed is that fair value gaps can reveal everything you need to know about the market, including which gaps will be traded back into and which are breakaway gaps.

What is the significance of the third candle in a three-candle pattern?

The third candle in a three-candle pattern is significant because it can indicate whether a fair value gap is a breakaway gap or not, which determines if the gap will be traded back into in the short term.

How can you identify a breakaway gap?

A breakaway gap can be identified if the third candle of the fair value gap closes above the previous candle's high, indicating that the gap will not be traded back into before reaching a certain draw on liquidity.

What is the difference between a breakaway gap and a normal fair value gap?

A breakaway gap is a type of fair value gap that will not be traded back into before reaching a draw on liquidity, while a normal fair value gap is expected to have a retracement into it in the short term.

How does understanding fair value gaps help in trading?

Understanding fair value gaps helps traders to identify potential entry and exit points, as well as to anticipate market movements, which can lead to more informed and profitable trading decisions.

What is the role of time in understanding fair value gaps?

Time plays a crucial role in understanding when a fair value gap will be traded back into. By considering the time frame and the market structure, traders can better predict the likelihood of a gap being filled or respected.

How does the market structure relate to fair value gaps?

The market structure, including intermediate-term highs and lows, helps to determine which fair value gaps are relevant and which ones the market will likely respect or target for future movements.

What is the importance of the previous candle's high and low in identifying fair value gaps?

The previous candle's high and low are important because they help to determine the nature of the fair value gap. If the current candle closes above the previous high, it suggests a breakaway gap, while closing below the previous low indicates a bearish fair value gap.

How can traders capitalize on the knowledge of fair value gaps?

Traders can capitalize on this knowledge by using it to make informed decisions about when to enter or exit trades, as well as to manage risk and anticipate market reactions to certain price levels.

What is the significance of overlapping fair value gaps and highs in the market structure?

Overlapping fair value gaps and highs in the market structure indicate areas where the market has offered fair value to both buyers and sellers. These areas are often respected by the market and can serve as potential support or resistance levels.