Fair Value Gap Simplified - Smart Money Course

Summary

This episode of 'Smart Risk Trading' explores fair value gaps, a key indicator of institutional money footprints, often overlooked by traders. It delves into the psychology behind these gaps, their role in market movements, and how they can be identified through candlestick patterns. The video explains the importance of liquidity zones and the cyclical nature of the market's tendency to fill gaps. It also provides criteria and rules for using fair value gaps effectively in trading strategies, emphasizing the need for a valid market structure break and the priority of gaps at market extremes.

Takeaways

• 📈 Fair value gaps are crucial for smart risk trading and often represent the footprint of institutional money in the market.
• 🔍 Identifying fair value gaps requires analyzing candlestick patterns and can be done in both bullish and bearish markets.
• 🌐 Market sentiment is driven by liquidity zones and fair value gaps, which are pivotal in market dynamics.
• 💧 Liquidity zones are vital for market momentum and are areas where the market seeks to accumulate liquidity.
• 🔑 A fair value gap is typically formed within a three-candle sequence and is noticeable when neighboring wicks do not overlap the middle candle's body.
• 🚫 In some cases, a four-candle sequence must be considered to accurately identify a valid fair value gap, especially when an inside bar is present.
• 🛑 The market tends to fill and rebalance gaps, creating a cyclical pattern that reflects its operation.
• 🧲 Pending orders within fair value gaps create a significant liquidity pool, attracting the price back to fill the gaps and continue the trend.
• ✅ To utilize fair value gaps, traders should look for price action when the price enters the gap to determine the direction of the next movement.
• 📉 In a bearish market, focus on fair value gaps in the premium zone for short positions, and in a bullish market, look at gaps in the discount area for long positions.
• 🔄 Fair value gaps at market extremes are prioritized for trade execution and should be considered one-time use after being mitigated by price action.

Q & A

What is a fair value gap in trading?

A fair value gap in trading represents a price area that the market tends to fill and rebalance, often considered as the footprint of institutional money in the market.

Why are fair value gaps important for smart money traders?

Fair value gaps are important for smart money traders because they play a pivotal role in executing well-informed trading opportunities and are a cornerstone in their strategies.

What are the two key factors that influence market movements according to the script?

The two key factors that influence market movements are liquidity zones, which serve as the lifeblood of the market, and fair value gaps, which the market consistently shows a tendency to fill.

How can traders identify fair value gaps from a candlestick perspective?

Fair value gaps are typically formed within a three-candle sequence and are noticeable as a large candle where the upper and lower wicks of the neighboring candles do not completely overlap the body of the middle candle.

What is the exception to identifying a fair value gap with a three-candle sequence?

The exception is when the first candle in a three-candle sequence is an inside bar candle, which forms within the preceding mother candle, requiring a four-candle sequence to identify a valid fair value gap.

Why do traders place limit orders below key zones during sharp market movements?

Traders place limit orders below key zones hoping that the price will make a deep pullback and activate their orders before resuming its upward movement, allowing them to enter the market at a better price.

How does the presence of pending orders within a fair value gap affect the market?

The presence of pending orders within a fair value gap creates a significant liquidity pool, which acts as a magnet for price, attracting it back to fill the void before resuming its trend.

What is the significance of identifying fair value gaps in different market conditions?

In a bearish market, traders should focus on fair value gaps in the premium zone for short positions, while in a bullish market, they should focus on gaps in the discount area for long positions.

What is the recommended approach for using a trading strategy or setup in a real account?

It is recommended to backtest a strategy or setup at least 100 times in a simulated environment before using it in a real account to ensure its effectiveness.

What is the role of an economic calendar in a trader's daily routine?

An economic calendar provides accurate and detailed information on upcoming economic events, which is crucial for a trader's fundamental analysis and planning of their trading activities.

How can traders utilize the fair value gap concept in market structure mapping?

Traders can utilize the fair value gap concept in market structure mapping by identifying potential gaps resulting from recent market momentum and waiting for the price to retrace to fill these gaps before continuing its primary trend.