Inversion Fair Value Gaps (IFVG) - ICT Concepts

Summary

This video explains the concept of inversions in trading, focusing on fair value gaps (FVGs) and their role in identifying potential price movements. It covers how an inversion occurs when a bearish FVG is closed over, and how consequent encroachment (50% of an FVG) influences price behavior. The video demonstrates practical applications of inversions with real chart examples, including entries, stop-loss strategies, and price targeting. It also discusses how old FVGs can support price trends, especially when transitioning from the sell side to the buy side of the market. Key concepts like liquidity sweeps and market structure shifts are also explored.

Takeaways

• 😀 Inversions occur when a fair value gap is closed or disrespected, creating a potential for price retracement or continuation.
• 😀 A fair value gap is a three-candlestick pattern where the first candle's low doesn’t overlap the third candle's high (bullish gap) or the first candle's high doesn’t overlap the third candle's low (bearish gap).
• 😀 Consequent encroachment refers to 50% of the fair value gap, which can act as a potential support or resistance level.
• 😀 If price retraces into a fair value gap and respects the consequent encroachment, it signals the potential for the price to move higher.
• 😀 Violating the consequent encroachment can signal a potential downward move as the fair value gap is no longer respected.
• 😀 Inversions can be used in trading by identifying when the price closes over a previously respected fair value gap, indicating a potential reversal or trend continuation.
• 😀 External and internal liquidity are concepts to understand when trading inversions, with external liquidity indicating price targets beyond recent highs/lows, and internal liquidity indicating the liquidity within a defined range.
• 😀 Old fair value gaps can be used to identify reaccumulation or redistribution phases, especially when price closes over these gaps, indicating potential reversals or trends.
• 😀 In trending markets, inversions can provide opportunities to enter trades, particularly when opposing fair value gaps fail to hold, signaling trend continuation.
• 😀 When looking for trade entries, using inversions on a smaller time frame, such as the 5-minute chart, after a larger market structure shift can help optimize entry points and risk management.

Q & A

What is a fair value gap in trading?

A fair value gap is a three-candlestick pattern where the first candle's low does not overlap with the third candle's high, or the first candle's high does not overlap with the third candle's low. This gap is crucial for understanding potential price movement.

What is an inversion in the context of trading?

An inversion occurs when a fair value gap, such as a CBI (bullish) or a bearish fair value gap, is closed over or disrespected. This can indicate a reversal in price movement, where the market might retrace or continue in the opposite direction.

What is consequent encroachment, and how is it used in trading?

Consequent encroachment refers to the 50% mark of a fair value gap. Traders use this level to determine if price will respect the area and move in the expected direction. If price moves below this level, it signals a potential change in trend.

How can an inversion be used to anticipate price movement?

Once an inversion is identified, traders look for price to retrace into the gap or move higher. If the price respects the consequent encroachment, it may continue higher; if violated, it could indicate a reversal to lower prices.

What is the significance of liquidity in the context of fair value gaps?

Liquidity refers to the buy and sell orders resting in the market. A sweep of liquidity, such as buy stops or sell stops, can lead to a change in price direction, often providing clues about future price movements.

What does it mean when price displaces over a fair value gap?

When price displaces over a fair value gap, it suggests a potential market shift. If the price closes above the gap, it may signal that the market is respecting the gap, and traders can anticipate further price movement in the direction of the displacement.

How can old fair value gaps be used in trending markets?

In a trending market, old fair value gaps, whether from the buy or sell side, can act as support or resistance. Traders look for price to revisit and respect these old gaps to determine possible entry points for continuation in the trend.

How do order blocks relate to fair value gaps?

Order blocks are key price levels where a significant amount of buy or sell orders are located. In conjunction with fair value gaps, they help traders identify areas where price may reverse or continue, especially when price revisits these zones.

What is a smart money reversal, and how does it relate to the fair value gap?

A smart money reversal occurs when there is a significant shift in market structure, indicating that large institutional players may be entering or exiting positions. Traders use fair value gaps to identify when this reversal is happening, looking for a close over the gap as confirmation.

What role do buy-side and sell-side liquidity play in market analysis?

Buy-side and sell-side liquidity play a critical role in market direction. Sweeping these liquidity levels (such as buy stops or sell stops) can trigger price changes. Identifying where these liquidity points are located helps traders anticipate future price movements, particularly when combined with fair value gaps and inversions.