Why Did ICT Switch From Order Blocks to Fair Value Gaps? ICT Trading Strategy

Summary

In this video, the comparison between Fair Value Gaps (FVG) and Order Blocks in trading is explored. The presenter delves into ICT's shift from using Order Blocks to focusing on FVG in the 2022 mentorship, explaining that FVGs are easier to teach and spot, with a focus on liquidity sweeps and displacement in the market. While both tools are effective, FVGs are favored for their simplicity and quick identification of price movement. However, Order Blocks offer higher risk-to-reward setups and work best with institutional behavior. Context and timing are essential for using both strategies effectively.

Takeaways

• 😀 ICT switched from using order blocks to fair value gaps because fair value gaps show when the algorithm is at play, indicating a significant displacement in the market.
• 😀 Fair value gaps represent imbalances in the market where one side of liquidity was taken, leading to price movement toward the other side of liquidity.
• 😀 An order block is defined as a down-close candle before an up move or an up-close candle before a down move. It is important for determining areas where large market participants enter the market.
• 😀 The key difference between order blocks and fair value gaps is that order blocks highlight large institutional entries, while fair value gaps highlight rapid movements or displacements caused by the algorithm.
• 😀 Displacement, or a forceful market move, is a critical concept in ICT's trading methodology. Fair value gaps are often formed during displacement, marking the presence of institutional involvement.
• 😀 Fair value gaps are valuable because they help identify areas where price will likely return to fill the gap before moving away, offering trading opportunities.
• 😀 Order blocks can provide higher risk-to-reward ratios compared to fair value gaps, making them attractive for traders seeking better profitability on their trades.
• 😀 ICT teaches fair value gaps in the 2022 mentorship because they are easier to teach and more reliable in identifying market manipulation through liquidity sweeps.
• 😀 The context of the market determines which tool to use—fair value gaps are most effective when liquidity is being swept, indicating market manipulation.
• 😀 The use of order blocks in conjunction with fair value gaps can improve the probability of successful trades, especially when order blocks are created within fair value gaps.

Q & A

What is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) is an imbalance or gap between two candles, where price moves rapidly, leaving behind orders that need to be filled. These gaps represent areas of liquidity where the market will likely return to before continuing its move.

Why are Fair Value Gaps significant in trading?

FVGs are significant because they show imbalances in the market where the algorithm has been active. This indicates that the market has moved swiftly toward liquidity, and price is expected to return to fill those gaps before continuing its trend.

What is the key difference between Fair Value Gaps and Order Blocks?

The key difference is that Fair Value Gaps indicate where the market was manipulated by algorithms to push prices toward liquidity, while Order Blocks show where large market participants (such as banks) entered the market and are expected to drive price back to those levels.

Why did ICT switch from using Order Blocks to Fair Value Gaps?

ICT switched to using Fair Value Gaps in 2022 because they are simpler to teach and easier to apply in identifying reversals, making them more accessible for traders, especially beginners.

What role does displacement play in trading with Fair Value Gaps?

Displacement refers to an energetic push or sharp price movement. In the context of Fair Value Gaps, displacement indicates that the market is being driven by larger forces (such as algorithms), which suggests that price will likely move toward liquidity after filling the gap.

How can Order Blocks provide a higher risk-to-reward ratio compared to Fair Value Gaps?

Order Blocks often provide better risk-to-reward ratios because they allow traders to enter the market after a confirmation of price movement, particularly when the market is trending in one direction. This results in more favorable entry points with larger price movements.

When is it best to use Fair Value Gaps in trading?

Fair Value Gaps are best used when there has been a liquidity sweep in the market. This occurs when price moves sharply to sweep liquidity and creates displacement, followed by the creation of a gap. This scenario indicates that the market is likely to return to the gap before continuing its trend.

Can both Fair Value Gaps and Order Blocks be used together?

Yes, both tools can be used together. In fact, ICT himself uses both when necessary. However, context is key. FVGs are ideal for liquidity sweeps, while Order Blocks are more effective in trend continuation scenarios.

What does ICT's 2022 mentorship focus on with respect to Fair Value Gaps?

ICT's 2022 mentorship focuses on using Fair Value Gaps to identify reversals. The program emphasizes understanding market manipulation and displacement, with FVGs being a key tool for spotting areas where price is likely to reverse.

What is the main takeaway regarding which tool to use between Fair Value Gaps and Order Blocks?

The main takeaway is that there is no one-size-fits-all tool. The choice between Fair Value Gaps and Order Blocks depends on the market context. FVGs work best for liquidity sweeps, while Order Blocks are ideal for trend continuation and offer better risk-to-reward ratios in those scenarios.