Arjo's "Fair Value Gap" Theory
Summary
TLDRThe 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.
Outlines
📈 Understanding Fair Value Gaps and Breakaway Gaps
The paragraph discusses the concept of fair value gaps in the market and how they can predict market movements. It explains that fair value gaps, particularly the third candle in a three-candle pattern, can indicate whether a gap will be retraced. The distinction between breakaway gaps (which are not expected to be retraced before reaching a certain level) and normal fair value gaps is highlighted. The speaker uses examples from NASDAQ to illustrate these concepts.
💡 Capitalizing on Fair Value Gaps
This section focuses on how to use the knowledge of fair value gaps to make profitable trades. It emphasizes the importance of understanding the draw on liquidity and how to identify breakaway gaps. The speaker guides through a thought process for capitalizing on these gaps by looking at different time frames and premium arrays. The goal is to identify when and where to enter trades based on the behavior of the third candle in a fair value gap.
🔍 Trading Strategies with Time Frames
The paragraph delves into the practical application of trading strategies using different time frames. It explains how to identify fair value gaps in various time frames, such as 15-minute, 1-hour, and 4-hour charts. The speaker advises on when to wait for retracement into a gap and when to expect a move towards draw liquidity. The concept of trading off and into fair value gaps is discussed, with an emphasis on not missing out on opportunities due to waiting for a gap to be filled.
📊 Market Structure and Fair Value
This part of the script explores the relationship between market structure and fair value. It explains that fair value is about offering both buyers and sellers a chance to participate in the market. The speaker discusses how the market seeks to rebalance by offering fair value, which is often seen in the form of gaps. The concept of overlapping fair value gaps and their significance in market structure is highlighted, along with the idea that the market will respect these areas to continue moving in a particular direction.
🚀 Enhancing Trading with Fair Value and Time
The final paragraph wraps up the discussion by summarizing the understanding of short-term and long-term fair value gaps and their relevance to trading. It introduces the concept of adding time as an additional factor to enhance trading strategies. The speaker teases the idea of a money-making team and invites the audience to a new website for more features and learning resources. The paragraph ends with a reminder to join the Sunday weekly forecast live stream for more insights.
Mindmap
Keywords
💡Fair Value Gaps
💡Breakaway Gaps
💡Candle Patterns
💡Retracement
💡Draw on Liquidity
💡Market Structure
💡Timeframes
💡Fair Value
💡Trading Strategies
💡Technical Analysis
Highlights
Understanding fair value gaps is crucial in the market as they can indicate potential future price movements.
Fair value gaps are identified through a three-candle pattern, with special attention to the third candle.
Breakaway gaps are a type of fair value gap that is unlikely to be traded back into before reaching a certain level of liquidity.
The third candle's behavior in a fair value gap can help determine if it's a breakaway gap or not.
If the third candle closes above the previous candle's high, it suggests a breakaway gap with a high probability.
Fair value gaps can be used to identify potential trading opportunities and to manage risk.
The concept of fair value is about offering a balanced chance for both buyers and sellers to participate in the market.
Market structure analysis can help in understanding which fair value gaps are more likely to be traded back into.
Fair value gaps that overlap with previous highs or lows are more relevant for trading decisions.
The market is always seeking liquidity, which can be understood through the concept of fair value gaps.
Understanding the time factor in relation to fair value gaps can enhance trading strategies.
The speaker's website offers resources for traders to improve their understanding and application of fair value gaps.
The speaker's YouTube channel provides a weekly forecast and live streams for traders to follow.
The speaker emphasizes the importance of not only identifying fair value gaps but also understanding their context within the market structure.
The speaker suggests that by understanding fair value gaps, traders can gain an edge over 99% of other traders.
The speaker provides a detailed explanation of how to analyze and trade using fair value gaps, including the use of different time frames.
The speaker's approach to fair value gaps combines technical analysis with an understanding of market psychology and liquidity.
The speaker's method involves a step-by-step process of identifying, analyzing, and capitalizing on fair value gaps.
Transcripts
I have a theory that fair value gaps
tell you everything you need to know in
the market so that also means that fair
value gaps tell you which fair value
gaps will be traded back into right
exactly so let's dive straight into it
first step understanding the three
candle pattern but paying extra
attention to details because we are
going to pay extra attention to the
third candle of that three candle
pattern right here I have marked out all
the recent fair value gaps on NASDAQ
what you're seeing here and the gray
boxes you are seeing right there are all
the recent weekly fair value gaps on
NASDAQ starting with this one and that
one and that one right there that one
that one that one and that one now can
you notice a certain difference right
here where they all have the three
candle pattern meaning they all create a
fair value Gap with the first one right
there creates a fair value Gap with 1 2
3 the second fair value Gap 1 2 3 right
there can you already notice a
difference between that first fair value
Gap and that second fair value Gap with
paying attention to the third candle so
if we dissect a fair value Gap being
created again it's a three candle
pattern with the first candle can do
whatever it wants can be consolidation
expansion whatever it wants to be the
second candle is of course always an
expansion phase what we're seeing on
that first for V Gap right there it's
always an expansion phase because that
creates the overall body of the fair Gap
the actual Fair Val Gap then the third
candle can either consolidate be an up
candle be a down candle and depending on
what that third candle is is how we
already will know if it is a breakaway
Gap a breakaway Gap is a fair value Gap
but within fair value gaps you also have
a different kinds of gaps where a
breakaway Gap is a fair value Gap but a
breakaway Gap is understanding that the
Gap will not be traded back into before
we reach a certain draw on liquidity so
in the short term in the next few
candles next two three candles we will
not trade back into a breakaway Gap so
if we understand the third candle of a
fair value Gap then we can understand
and have a great idea already if that
fair value Gap is actually a breakaway
Gap and if we look at this screen right
now then we see the red fair value gaps
and we have green fair value gaps all
the red fair value gaps are Breakaway
gaps and the green fair value gaps are
just your normal fair value gaps that we
can expect a retracement into in the
short term as well why is that because
if we again look at that first Fair Val
Gap what do we see we have again 1 2 3
this last candle the third candle right
there that can be a consolidation
expansion whatever it wants to do but if
it wants to expand higher meaning as a
general rule of thumb if it wants to
close above the previous
candle High meaning previous candle high
of the second candle that is the
expansion phase if it wants to close
above that right there then that as a
general rule of thumb means that we are
not going to trade back into the F Gap
right there before we continue higher so
here we can see yes eventually we trade
back into it but in the short term we do
not trade back into it then that is
already the first indication but not the
only one that it is that that is a
breakaway Gap then the second Fair Val
Gap the green one right there this is
the previous weak high as in that is the
previous high of that candle again this
is fractal it's not only on the weekly
do we close above it no a great
indication that once we leave behind
that F Gap we actually want to trade
into it to then continue higher with in
the third Fair Val Gap what do we see do
we close above that previous candle High
the second candle right there no so we
trade back into it that third fair value
Gap also a green Fair Val Gap because
what do we see on the previous candle
low do we close below it right there no
so the next candle in the short term can
trade back into the F Val Gap that was
created then after that what do we see
on this candle right there again 1 2 3
we see that we are closing above the
previous candle's high and that is the
same for the next candle right there
which both these Fair V gaps right there
are what Breakaway gaps where this right
there the next Green Fair Val Gap is not
why not because again same exact thought
process right there so that is only the
first step and if we understand that
first step that's already an incredible
step we already know more more than 99%
of the Traders on which fair value Gap
will actually be traded back into but
this is all fun of games but how do we
now actually capitalize on this the
knowledge is fun but we want to make
money here so what do we do in this
situation so I want us to pay attention
to this green fair value Gap right there
going to remove it going into the replay
mode to show you exactly the thought
process right here we are moving higher
we are moving towards a draw on
liquidity so understanding the draw on
liquidity right here is again the
closest premium array right there we've
been moving higher draw liquidity the
closest premium array now why is this
Breakaway Gap quite important to
understand because on the next candle
the next weekly candle that opens we now
have a weekly fori Gap sitting right
there so now we need to take into
account all right if we want to reach
this draw liquidity right there do we
first come back into this weekly for Gap
or do we already deliver higher towards
a draw on liity first so what will be
traded back into first the discount
array right there in the form of that
Weekly fair value Gap or the draw
liquidity in the form of that Premier
That Swing high sitting right there well
based on our understanding already we
knew that if this right here closes
above the the previous week high the
previous candle high that third candle
closes above the second candle which is
the expansion phase we understand
already that this now has a high
probability of being a breakaway Gap
meaning that we are likely going to
trade into this draw liquidity first
before we actually reach for that
Breakaway Gap meaning that on the weekly
time frame we currently do not have a
clear discount array the tradeoff of so
what do we do we are now going down one
time frame so if you have a breakaway
Gap you go down a time frame to look for
a new fair value Gap to trade off of so
if we go down into the daily time frame
then on the daily time frame we are now
seeing that we have the draw liquidity
right there and we also have this daily
Fair Val Gap sitting right there so that
daily fa Val Gap is now the f back up we
want to trade off of so here we are now
first targeting this context High
because again understanding that market
maker model we are forming a market
maker buy model here moving from a
discount array to that premium array
this is the area right there where we
want to get involved and afterwards we
need that new context again so this
daily fi Gap will again be responsible
currently to push price higher so why is
that important because now we are not
left waiting for that Weekly F Gap to
hopefully be touched sometime no we are
already getting involved right there
where it's the same exact premise can
you see where this candle close right
there did it close above that previous
candle's high no so what will it do
trade into the fair value Gap sitting
right there that is the highest
probability thing to happen so so now
what do we do we go into the 4our as
well to see all right how can we now
look to potentially capitalize on this
ID that we have if we skip price a few
ticks right there then eventually we are
seeing this very interesting we are now
creating this 4our for Gap right there
that 4our for Gap let's take it into
account what is happening well we have
that third candle the third candle is
closing above the previous candle high
sitting right there what is this price
action likely going to reach for first
the fair value Gap right there that we
might trade higher off of or this draw
on liquidity right there well based on
this knowledge based on the knowledge
the simple knowledge that we currently
have on Breakaway gaps which we are
going to add on to as well this is only
the first part we understand that right
now there's a higher probability of
coming into the draw liity first before
even coming into the 4our valap right
there so let's not get left waiting
because on the 4H hour we simply do not
have any discount array do not have a 4H
hour F Gap to trade off of right now so
what do we do we allow ourselves to go
down a time frame right now to see do we
have a discount array do we have a fair
vag up here to trade off of no not yet
why not because we are not creating that
fa vag up just yet just after the next
candle so what can we do again we can go
down another time frame right there to
find that fair value Gap so here on the
15minute time frame right there do we
now have a 15 minutes Fair VAP yes so if
we want to trade in into any fair valap
then it will be the 15 minute fair value
Gap sitting right there so if we skip
price a few ticks right there that is
exactly what we are seeing which if we
waited endlessly for the 4our V up right
there or even even the 1 hour then we
would simply not have that sting into it
before we reach the draw liquidity
sitting right there that is extremely
important to know to of course
capitalize on the Move also not get left
behind understanding which fi gaps we
want to trade into because we can trade
off of them but we can also trade
towards them because here we are on the
daily time frame again and we are seeing
we're pushing higher nicely that daily F
Gap we've reached the first Target right
there so right now we want to wait again
let's wait a little bit because we also
understand right now that what is
happening whilst this new week is
forming right there we also see that of
course there's a new weekly fair value
Gap forming which that right there is
the previous candle High which will
create a new fair value Gap in the form
of this this fair value Gap sitting
right there so here on the daily time
frame we want to now wait a little bit
because we know there is currently a
weekly fa Val Gap in the making as well
and what do we see on the daily time
frame we now see something very
interesting because we also see that we
are now failing to create a new fair
value Gap higher of that previous fair
value gap which is already a concept
we've gone over a lot of times because
that indicates that there's a lack of
intention currently which is in perfect
alignment right now with understanding
that Breakaway Gap as well because here
we are not closing above that previous
candle high on a weekly basis right
there which means that the next few
candles we can look to trade into the
weekly fi Gap and we can also look again
to trade off of that Weekly fair value
Gap by understanding again that here on
the weekly time frame we have what we
don't have that close above that
previous candle high right there which
indicates that this is not a breakaway
gap which indicates that there's a high
probability we will likely trade into
this faga first before we actually move
to the draw liquidity and that Weekly V
Gap is again where we can trade into it
and we can also look to trade off of it
trading off of it right there is the
highest probability thing to do which if
we now look to trade offit then again
the first Target is this High then of
course after that it's this draw on
liquidity sitting right there so if we
understand that and we go into the 4our
time frame then on the 4our time frame
We are continuing higher nicely overall
right there eventually right there NFP
also happens and we haven't even
Incorporated time just yet where NFP
right there stinks into that 4-Hour for
V Gap sitting right there and eventually
continues higher targeting of course the
first Target sitting right there but at
this moment in time we create again that
new 4our app also continue higher
off of that then right there on that day
on that Monday what do we have we have
on the 1 hour a 1 hour for V up in the
making currently and right there we
could argue that we have this candle
well argue we see clearly that this
candle right there is closing above that
next candle's High all right so likely
we will reach the draw liquidity first
before we actually retrace into the 1H
hour for Gap so let's dive into a time
frame below the 1 hour right there which
on the 15 minute we see we have this
15minute Fair Val Gap sitting right
there now this situation what you would
do here is you would still use the 15
minutes forap just to keep the objective
right there because we have that context
sitting there so we can't take that away
but if we look at this 15 minutes for
vag Gap what do we also see we do see
right there that on the 1 hour the 1
hour vag Gap is even a little bit higher
than the 15 minutes for vag G so what do
you do in a very rare situation like
this you just simply wait you wait if we
get that retracement into the 1our for
Gap perfectly fine we're still happy to
get involved because we still had that
15 minutes for Gap as well sitting
inside that 1 hour for Gap so the rule
overall is still valid but we understand
that it might not want to trade into
that 1our for Gap so what do we do we
just wait if it trade into it we are
still bullish we take a trade off it if
not and we reach that draw liquidity
right there perfect we also know why and
we don't want to trade off that 1 hour
fori gap anymore because because again
we are looking at shortterm returns into
fair value gaps not after a few candles
no what are the next candles likely
going to do right there and in the next
candles we do see that we are coming
into that 1our fi Gap right there to
then continue higher towards the draw
liquidity overall this was the first
understanding as in this is the basic
knowledge of a breakaway Gap that you
have just learned what is the next
knowledge of a breakaway Gap because
after we take that draw liquidity both
those draw liquidities actually then
what do we do Which F vaps do we use
right now because we have quite a f v
gaps to choose from right here so what
do we actually do right now this is
where the flot concept now comes in plus
the fair value concept again a quick
story on Fair Value what actually is
fair value the market is always offering
fair value in other words rebalancing
something those are the same things fair
value and rebalancing or the market is
seeking liquidity so if we understand
that then what actually is fair value
fair value is like it already says in
the name it's offering fair
value meaning that both buyers and
sellers should get a fair chance to get
involved in the market so when there's
only buyers in the market there should
also be a fair chance for sellers to get
involved if they want to get involved
then let's offer them a fair chance to
actually get involved which is why a
bullish fair value Gap right there is
usually what it's only buyers in the
market which is why it's called a fair
value Gap in the first place because
there's a lack of fair value there so we
need some sellers inside that bullish
fair value Gap to actually offer the
fair value to then continue higher so
with that logic we could argue that
every fair value Gap should be traded
back into right and that was also my
first understanding of a fair value Gap
until I dove deeper into it because if
we zoom out a little bit and we make use
of overall structure Market structure of
the market then what do we actually see
well if we zoom out then here we have
this buy side offering so here we've
been going higher so overall we can
argue there has been buy side offered
right there after after we make this
retracement into the weekly fair value
Gap to offer some fair value and after
that we move a higher again so in those
recent swings one 2 three right there
that creates what creates a mitigation
block but not only that that also
creates a fair value area because if we
want to continue higher right now then
where is the only place that we have not
offered fair value just yet everything
Above This high right there because
everything above that high what happened
let's zoom in a little bit everything
above that high we only had buy side
where below that high so this area again
is where we had what we had buy sides in
the form of this move higher right there
we had sell side in the form of that
move lower buyers and sellers both got a
fair chance to get involved after that
we move higher above that high which is
what we call a market structure an
intermediate term High which creates the
area above that high again above the
intermediate ter High which is the only
area that we have not offered fair value
in the short term right there I hope I
can hear some clicking sounds in your
mind because which also means of course
that if everything above that high is
not offered fair value value just yet
then the only place that we can return
to to continue higher is what it's the
high right there with the
overlapping fair value Gap that is the
area that price is going to want to
respect right there to then continue
higher off of that which we are
consistently seeing look at these highs
overlapping with the for gaps look at
these highs overlapping with the for
gaps look at SE lows right there
overlapping with the F gaps because
those areas are where fair value is
meaning we should respect those areas
respecting again meaning that we are
wicking those areas but we are not
closing below it and we are not creating
bearish fair value gaps lower if we do
do that and we do create those bearish
fair value gaps lower for example in
this instance right there where we also
have those lows but we create bullish
Fair value gaps higher right there then
that means that we will Target opposing
liquidity why is that because the market
is either doing one of two things
offering fair value or seeking liquidity
so if it's not offering that fair value
which that right there is fair value
then it should move higher right if it's
not doing that and it wants to continue
lower and we have bearish Fair fire gaps
then it's doing what it's seeking
liquidity so this fair value Gap right
there is the exact fair value Gap that
you want to trade off of which also
means that this fair value Gap right
there the lower fair value gaps even
that lower fair value Gap right there
are all IR relevant the value Gap that's
overlapping with the high that's the
relevant fair value Gap but why then on
this high right there we had to sting
into that lower for fire gap because
that is where now time comes in where we
have three factors we looked at that
previous candle High previous candle low
that close what is that third candle
right there doing is it closing above a
previous candle High Etc that indicates
the first step to understand that
breakway Gap then the next scenario is
understanding the fair value and then
the next understanding which we can go
over in the next video so if you want
that then please leave down a comment
and tell me if you would like that the
next step and the validating factor is
understanding time and after we continue
higher right there of course what are we
doing well we are also creating now what
daily fair value gaps higher right there
do we want to trade into those daily for
GS well if we zoom out a little bit more
then what do we see we see the same
thing happening right here with the fair
value offering right there so if if we
want to continue higher we will want to
respect these highs right there with
overlapping Fair Val gaps to then
continue higher off of that which means
that overall if we have very low fair
value gaps sitting in these lags they
are currently not relevant because if we
want to continue higher towards this
higher draw liquidity in the form of
that fap first and then afterwards even
the highs then we will want to respect
the F gaps that are overl happing with
the highs which means that everything
below that becomes what a breakaway Gap
and we confirm that with that extra
layer and to sum it up right there what
have we just done we Now understand on
the short term so in the next few
candles if price wants to trade into a f
Gap right there and we also understand
in the longer term where price wants to
trade into fi gaps does it want to trade
into the lower fi gaps into the previous
Breakaway gaps or does it want to
respect the fire gaps that are at the
fair value area right there so both on
the short term and the long term We Now
understand which fair value Gap actually
wants to be traded back into and now
imagine if we add time into the mix so
of course if you like this then you will
absolutely be blown away by the
money-making team and I have good news
because the website for the moneymaking
team is open again so we have moved to a
new website in that new website we are
working on again a lot of new features
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learning curve so if you have any
questions about that about the new
website Etc what you can expect what's
the difference between the masterclass
and Essentials then please feel free to
reach out to info@ rio. then of course I
would also be very happy to see you
tomorrow on Sunday weekly forecast of
course the live stream here on YouTube
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time perfect thank you
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