ICT Mentorship Core Content - Month 04 - ICT Fair Value Gaps FVG

Summary

The video script delves into the concept of 'fair value gaps' in trading, illustrating how price can gap to create a vacuum of trading within a certain range. It uses the EUR/USD daily chart to highlight a specific fair value gap, explaining the significance of price movement and liquidity on either side of the gap. The discussion also touches on the interplay between fair value gaps, liquidity voids, and order blocks, providing practical examples of how these concepts overlap in real-time trading scenarios. The script promises further insights and study materials to help traders understand and capitalize on these market phenomena.

Takeaways

• 📈 A fair value gap is a price range where one side of the market liquidity is offered but not matched, creating a vacuum of trading and resulting in a price gap.
• 🔍 The script uses the EUR/USD daily chart to illustrate a fair value gap, highlighting a specific blue shaded area as an example.
• 📊 The significance of a fair value gap is marked by the presence of liquidity on either side of the gap, which has been traded up into once already, indicating potential future price movement.
• 💹 The script explains that the gap is not concerned with the entire price range but focuses on the area between the low of the previous candle and the high of the next candle.
• ⏳ The concept of fair value gaps is important for understanding price action and potential trading opportunities within a specific time frame.
• 🔄 The script emphasizes that fair value gaps can be seen in different time frames, with smaller time frames often showing a liquidity void where the gap is indicated.
• 📉 The script discusses how price action can fill in fair value gaps, using a four-hour chart to demonstrate how price eventually trades back up into the gap.
• 📋 The script also touches on the concept of liquidity pools and voids, explaining how they can overlap with fair value gaps and influence price action.
• 📝 The speaker mentions that more detailed information about fair value gaps, liquidity voids, and related concepts will be provided in study notes and supplementary teachings.
• 📈 The script concludes with a practical example of how the concepts discussed can be applied to live trading, demonstrating the potential for profitable trades based on understanding fair value gaps and liquidity dynamics.

Q & A

What is a fair value gap in trading?

A fair value gap is a range in price where one side of the market liquidity is offered and typically confirmed with a liquidity void on the lower time frame charts in the same range of price. Price can gap to create a literal vacuum of trading, thus posting an actual price gap.

How is a fair value gap identified on a chart?

A fair value gap is identified on a chart by looking for a range where there's a significant price movement that leaves a 'pocket of space' without trading activity, usually framed by a candlestick pattern on either side.

Why is the blue shaded area on the daily chart considered a fair value gap?

The blue shaded area on the daily chart is considered a fair value gap because it represents a 20 pip range where no trading activity occurred outside of a significant down candle, creating a vacuum in trading within that price range.

What significance does the down candle to the left of the fair value gap have?

The down candle to the left of the fair value gap signifies that the price had previously traded up into the range, indicating buy side liquidity had been offered and then taken, which is crucial for understanding the formation of the fair value gap.

How does the concept of fair value gaps relate to trading strategies?

Fair value gaps are significant in trading strategies because they represent areas where price is expected to eventually trade back into, filling the gap. Traders can use this understanding to anticipate and capitalize on price movements that seek to fill these gaps.

What is the importance of the 105.15 to 105 big figure price range in the context of the fair value gap?

The 105.15 to 105 big figure price range is important because it represents the area where buy side liquidity was previously offered and taken, and it is not the focus of the fair value gap. Instead, the focus shifts to the lower area between 105 big figure down to 104.75, which is the actual fair value gap.

Why is it important to study fair value gaps on the specific time frame they occur?

Studying fair value gaps on the specific time frame they occur is important because it provides the accurate context for the gap. While gaps can be broken down into smaller time frames, they may appear as liquidity voids with multiple candles creating the open space of range.

How can the concept of fair value gaps be applied in a range-bound market?

In a range-bound market, fair value gaps are particularly useful as they can signal potential areas for price reversals or continuations. Traders can look for opportunities to enter trades when the price approaches these gaps, anticipating a return to fill the gap.

What is the significance of the price movement from the low to the close of a candle within a fair value gap?

The price movement from the low to the close of a candle within a fair value gap indicates that buy side liquidity was offered and accepted at that range. This information is crucial for traders to understand the potential for price to return to that range to fill the gap.

How do liquidity pools and liquidity voids relate to fair value gaps?

Liquidity pools and liquidity voids are related to fair value gaps in that they can both contribute to the formation of gaps. A liquidity pool can lead to a price run that creates a gap, while a liquidity void can occur when there's a lack of trading activity in a specific price range, which can also lead to a fair value gap.

Outlines

00:00

📈 Understanding Fair Value Gaps in Trading

This paragraph introduces the concept of 'fair value gaps' in trading, which are price ranges where one side of the market liquidity is offered but not matched, creating a vacuum of trading or a price gap. The speaker uses a euro dollar daily chart to illustrate a fair value gap, highlighting a specific blue shaded area that represents a 20 pip range. The significance of this gap is explained by referring to the candlestick patterns on either side of the gap, indicating previous buy side liquidity. The speaker explains that the fair value gap is a range that has been traded up into once, suggesting potential future price movement to fill the gap.

05:02

🔍 Analyzing Fair Value Gaps on Different Time Frames

The second paragraph delves deeper into the study of fair value gaps, emphasizing that these gaps are specific to the time frame being analyzed. It suggests that on smaller time frames, what appears as a fair value gap on a larger time frame might show as a 'liquidity void', where multiple candles create an open space. The speaker uses a four-hour chart to demonstrate how price eventually trades back up into the fair value gap, filling it in. The concept is further explained with the idea that once the sell side liquidity is taken out, as evidenced by a price drop below a previous low, the market is expected to fill in the gap. The paragraph also touches on the idea of 'turtle soup' or false breaks below old lows as part of the trading strategy.

10:02

📉 Observing Real-Time Fair Value Gap Filling

In this paragraph, the speaker focuses on a real-time example of a fair value gap being filled. They discuss a specific price level, 104.75, and how it was pierced, creating a liquidity pool and running buy stops. The discussion includes the observation of price action on a 5-minute chart, highlighting how the market trades through the level twice, creating gaps and filling them efficiently. The speaker also explains how the market's movement can be anticipated based on the previous high and the fair value gap, using the 15-minute chart to illustrate the point. The paragraph concludes with a detailed look at the price action and how it efficiently fills in the gaps, providing insights into liquidity pools and voids.

15:03

🚀 Price Action and Liquidity Delivery Efficiency

The final paragraph wraps up the discussion by connecting the concepts of liquidity pools, voids, and fair value gaps. It uses the 15-minute chart to show how price action efficiently fills in gaps, creating a 'perfect delivery' of price. The speaker points out specific instances where the market's movement matches the expected liquidity delivery, highlighting the efficiency with which the market operates. The paragraph also discusses the potential for selling off positions when the market reaches certain levels, anticipating a run of sell stops below a low. The speaker assures that more detailed scenarios and content will be provided in the upcoming study notes and supplementary teachings.

Keywords

💡Fair Value Gap

A 'Fair Value Gap' refers to a range in price where there is a lack of trading activity, creating a vacuum in the market. This concept is central to the video's theme of trading strategies within a price range. In the script, the speaker identifies a 'Fair Value Gap' on a Euro Dollar daily chart, explaining it as a 20 pip range where the market has not traded, indicating a potential area for future price movement.

💡Liquidity

Liquidity in the context of the video refers to the presence of buyers and sellers in the market. It is a crucial concept as it influences the ease with which assets can be traded. The script discusses 'buy side liquidity' and 'sell side liquidity,' illustrating how these affect the price movement and the formation of gaps like the 'Fair Value Gap.'

💡Price Gap

A 'Price Gap' is a term used to describe a sudden shift in the price of a security with no trading occurring between the two prices. This is a significant concept in the video as it often signifies a change in market sentiment or a significant event. The speaker uses the term to explain the creation of a 'Fair Value Gap' and how it can lead to future trading opportunities.

💡Candlestick Chart

A 'Candlestick Chart' is a style of financial chart used to describe price movements of a security, derivative, or currency. Each 'candle' represents a specific time period and displays the open, high, low, and closing prices. The video script uses candlestick charts to identify 'Fair Value Gaps' and to analyze price action, such as the 'blue shaded area' indicating a 'Fair Value Gap.'

💡Pip

In forex trading, a 'pip' is the smallest amount by which a currency quote can change. It is a unit of measure used to express changes in exchange rates. The script mentions a '20 pip range' when explaining the 'Fair Value Gap,' indicating the size of the gap and its potential significance in trading strategies.

💡Liquidity Void

A 'Liquidity Void' is a term used to describe a period where there is a lack of market participants, leading to a potential for large price swings. This concept is related to 'Fair Value Gaps' as it often occurs in lower time frame charts. The speaker discusses how a 'Fair Value Gap' on a higher time frame might appear as a 'Liquidity Void' on a lower time frame.

💡Order Blocks

An 'Order Block' refers to a level at which a significant number of buy or sell orders are concentrated. This concept is important in the video as it can lead to price gaps and influence the formation of 'Fair Value Gaps.' The speaker mentions 'Order Blocks' in the context of understanding where liquidity is offered and how it can create gaps in the market.

💡Breakaway Gap

A 'Breakaway Gap' is a type of price gap that occurs when the price moves away from a period of consolidation. This concept is mentioned in the script as a type of gap that traders should be aware of, and it is related to the 'Fair Value Gap' as both are significant for traders looking to identify potential trading opportunities.

💡Turtle Soup

In the context of the video, 'Turtle Soup' refers to a trading strategy where a trader expects a price to reverse after a significant move. The term is used metaphorically to describe a situation where the market 'eats' the recent price movement, such as a run below an old low, and then reverses, providing a trading opportunity.

💡Range Bound

A 'Range Bound' market is one where prices move within a specific range, showing little trend. This concept is important in the video as it sets the context for the type of market conditions where 'Fair Value Gaps' are more likely to occur. The speaker discusses how 'range bound' markets are conducive to strategies that look for 'Fair Value Gaps' and stops.

Highlights

Introduction to the concept of 'fair value gaps' and their significance in trading within a range.

Definition of a 'fair value gap' as a price range with a liquidity void on lower time frame charts.

Explanation of how price gaps create a vacuum of trading, leading to actual price gaps.

Identification of a 'fair value gap' on a euro dollar daily chart, marked by a blue shaded area.

Discussion on the significance of the gap and the market liquidity offered on either side of it.

Analysis of a specific candlestick pattern that indicates the presence of a fair value gap.

Explanation of how the range between two specific price points is not of concern due to previous trading activity.

Identification of buy side liquidity offered on two candles framing the fair value gap.

Delineation of the fair value gap as a specific price range left open without trading.

Emphasis on the importance of studying fair value gaps within the context of the specific time frame being analyzed.

Illustration of how smaller time frames may show a liquidity void where the gap is indicated on a higher time frame.

Description of the expected market behavior to fill in the fair value gap due to the nature of price action.

Analysis of a four-hour chart to observe the price levels and the potential for a liquidity run on sell stops.

Discussion on the expectation of price to return to fill in the fair value gap after a sell side liquidity run.

Observation of price action that confirms the filling of the fair value gap and the completion of a trading idea.

Highlight of the profitability and probability of trading fair value gaps and double tops in the market.

Advice on the type of trading to focus on during range-bound market conditions, specifically looking for stops and fair value gaps.

Overview of the educational content and supplementary teachings planned for the month of December to enhance understanding of the concepts.

Demonstration of the overlap between liquidity voids and fair value gaps using a five-minute euro dollar chart.

Analysis of a specific price level being pierced and its implications for liquidity pools and fair value gaps.

Explanation of the concept of efficiency in price delivery and how it relates to the filling of gaps in price action.

Identification of a perfect delivery of price and the subsequent trading opportunities that arise from it.

Conclusion on the importance of understanding the interplay between liquidity pools, voids, and fair value gaps for effective trading.

Transcripts

we'll be dealing specifically with the

reinforcing of fair value gaps

and it's a concept of trading inside the

range

okay what is a fair value gap

it is a range in price delivery where

one side of the market liquidity is

offered and typically confirmed with a

liquidity void on the lower time frame

charts in the same range of price

price can actually gap to create a

literal vacuum of trading thus posting

an actual price gap

okay let's take a look at a

euro dollar daily chart

okay and i'm going to ask you where do

you see an example of the fair value gap

okay i'm going to draw your attention to

it here

it's a blue shaded area here

on the daily chart let me explain to you

why i'm shading in that specific area of

price

it's about a 20 pip range

on the daily

but inside of that

blue shaded area

that is what is common referred to in my

work as a fair value gap

so take a look at what makes

that gap so significant

as you can see here the candle

to the

left

of the down candle we're looking at that

comprises the fair value gap

that's this candle here

okay and to the left of that we have the

higher

bearish candle

and i'm drawing attention to the fact

that it has a

down close but it's come off the low

okay so we're looking at the low up to

the close that little wick in there

if you take that same range okay and you

look at our

down candle that created that fair value

gap on the daily chart

that range between

105 15

to approximately 105 big figure

inside our down candle and in this

candle here that's highlighted from the

low

to the

close

that price range has been traded

up into

once already delivering the buy side

liquidity in other words on this

candle's low up to the close price

had come off that low

so if it came off that low to have a

higher close on that candle that means

the buy side liquidity had been offered

on that range between 105 15

to 105 big figure

so that means when we look at the down

candle

that makes the fair value gap we're not

concerned with the 105 15 to 105

big figure price range so we're going to

be drawing our attention to that low

here

and we'll draw that

out in time but let's now look at the

other candle

that frames our fair value gap

the next area

at which we see buy side liquidity

offered

is from this green candle or up close

candle to the right

of our down candle that makes the fair

value gap

the open to the high on this candle has

offered by side liquidity as well so we

have

seen price offered on the up

movement

or buy side liquidity

on two candles one to the left of our

fair value gap creating down candle on

the daily chart and one candle to the

right of it where we saw price move

higher

in portion of that down candle

so we have a range left that's open

and it specifically is this area right

in here

so we're delineating

the low of the previous candle and the

high of the count to the right of the

down camera that creates that little

pocket of space

so between

105 big figure

down to

104.75

about 25 pips

that is our

fair value gap and it's been left open

there's been no trading outside of the

movement of that range except for that

down candle

and no up movement at all on this time

frame

now when we're looking at fair value

gaps

okay it's important to remind you that

if we're studying a specific time frame

the gap occurs on the time frame you're

looking at

you can break this down further into

smaller time frames but in the smaller

time frames you'll probably end up

seeing a liquidity void

where the gap would be indicated here on

this time frame on a lower time frame it

would many times appear as a liquidity

void where it's multiple candles that

create that open space of range

okay so now we have our daily chart here

we have our specific levels in mind that

we're watching and the two little line

segments delaying one candle is low and

one candle is high in between those two

reference points we have that big down

candle and the exposed area in between

that is the fair value gap that only the

cell side liquidity has been offered so

imagine that paint brush analogy i've

used many times in the past

on the down candle that creates the

lowest low here

there's a range with the candle before

it and the candle after it

where it has left a pocket of porous

price action or only delivered on the

downside

we're going to expect price to

eventually want to trade back up into

that little gapped area

so this area in here that's where we're

looking to see it fill in

that's the nature of a fair value gap

so when we look at price and we're

zoomed in a little bit now here with a

four hour chart

okay and you can see that the two

specific price levels again are

delineated as well

and we have a low

delineated

for potential liquidity run on sell

stops below the low

price does in fact go down below that

previous low

and well now we can expect to see what

form

a turtle suit or false break below an

old low

why would we reasonably expect it to go

back up to fill in that gap well because

we've already taken the sell side

liquidity out

by running an old low

we have equal highs here delineated also

on our chart on a four hour basis and

right above those equal highs we have

our fair value gap

eventually price does in fact trade back

up closes the fair value gap in

that trade or that idea is now complete

while it doesn't look like a great deal

of

money or pips offered it's a very highly

profitable and probable

condition in the marketplace where we

can see these fair value gaps and

double tops where buy stocks will be

resting above it and if you see a

turtle soup run below an old low you're

in a range

this time of year going into the end of

the

2006 trading year going into the

holidays uh trading is going to be range

bound and when you're in a range bound

consolidation type format or profile for

the marketplace this is the style

trading you want to be doing looking for

stops and looking for fair value gaps so

it was well over 100 pips of a move and

it only took about two days to to

complete that little price swing

and in fact this range

of price action in the form of a fair

value gap was actually detailed to you

in the beginning of this week

where we delineate it on the daily chart

the fair value gap as outlined here

and on the daily chart you can see it's

been filled in here

so while there's a lot of information

about fair value gaps and breakaway gaps

and measuring gaps that's going to be

coming your way in the form of the

december study notes

just understand that everything has been

shown here is reversed

for buy side liquidity runs where the

market will come back and closing a fair

value gap that's below the marketplace

to seek to fill in the sell side

liquidity

i want to take a quick look at something

else because i mentioned

that the gaps fair value gaps liquidity

voids

order blocks and liquidity pools they

kind of overlap a lot of in a lot of

different ways that you're probably not

aware of yet and that's what the benefit

of having the pdf files

study notes and also the supplementary

teachings that's going to happen next

week monday through friday while we're

away from live trading and live sessions

with the ict mentorship you will be

getting a daily video supplementing

these specific

techniques and concepts for the month of

december so to help you

really dial in on the concepts going

forward so that we are prepared and

primed for the content for january 2017.

but i want to take you back over to the

charts and give you something by way of

understanding the overlap of

liquidity voids and fair value gaps

okay folks we're looking at at 104.75

level

i have the charts trained in on a five

minute euro dollar

and we're seeing the very moment that

that 104.75 level was

pierced here

on the 19th this is the second time it

trades through

that 104 75 level

and i want to just draw a special

attention to

this area up here

okay

and now i'm going to show you what it

looks like when we have a

a run above an old high

which is what this is 104.75

it's also run on liquidity in the form

of a liquidity pool

so it's running buy stops

but also

it's hitting that fair value gap also so

straight into the fair value gap

and i said in lower time frames many

times this will create a liquidity void

you see a movement lower here on this

candle

and then we have another candle here

look what happened

the next candles open is down here

so you have this gap in here

so price trades up into that and closes

that in right there

see that

price then

moves lower

significant break lower

and then lower

and ultimately trading through

to where the cell stops were mentioned

earlier

okay let's take a look at it on a

15-minute basis

here's the

first time it trades up into that 104 75

level

closing that fair value gap

and then here's the second time it

trades up into it running out the

previous high

the previous high this time was at

104.77

this candle's high comes in at 104.78

so it trades to it just by one pip

now watch the difference here

we have a down candle here a lot of

movement lower but it comes off that low

watch what happens now

we gap

we get from this candles close

104 72 to an opening

on this candle

of 104 70. now it's only two pips

difference but that creates a what

a gap

so we can be a seller

at a more refined price level mentioned

and earlier time we said that we could

be a seller at 104.70

on a limit

when price trades back up to that level

if it doesn't give us an opportunity to

go on a limit we can trade it right as

it hits it

live it can be in front of the charts

right there there's your cell now here's

the thing look at the body's clothes

on this candle right here the close is

104.72

that's exactly the high on this candles

close 104.72 the wick trades through the

body

but the bodies of the candle

completely close in here so this gap

between these two candles these two

black down candles

this gap in between the bodies have

perfectly been filled in with this up

candle so this is exactly what i'm

referring to as efficiency in terms of

the price delivery

if this movement lower has been offered

on the downside

okay now think look closely this candle

is high

comes in at

104.78

the close is at 104.75 the next candle

it opens

at 104.76 i'm sorry 104.74 and then it

creates a high

at

104.76

so it moves two pips up so from the

opening

to the high is buy side liquidity

offered

then it trades down for a down close

then we gap down here

there's a gap of buy side liquidity from

these two candles from this candle's

opening

that's exactly where this price goes on

the upside from the open to the high the

open is 104.63 the high is 104.74

which is the opening here

104 74. that's the last point at which

the buy side liquidity is offered on the

up movement then it's all down from the

opening

it fills in that perfect

delivery of price right there

and then at that moment when you see

this live

you can be a seller at that moment

and price does exactly

what we mentioned earlier when we're

looking at the higher time frame

this delivery here price

from this candle is low up to the close

buy side was offered here and buy side

was offered from the opening to the high

here so there's a gap closure here on

all the downside movement here so this

has all been closed in so efficiently we

could look for

this range being delivered lower

we have to consider back here where

price was delivered on the buy side here

so this low

comes in at 104.55

so if we drop that down to there 104 55

that's where the last point at which the

low had traded up

to the close so buy side liquidity has

been delivered

here it's all sell side liquidity at

this moment here it's all sell side now

nothing over here

until we get over here

so we created a gap down here

price trades up hits it here hits it

here

we could be a seller at 104.55 or 104.50

looking for a move down below 104

15 to 104 10.

there's your run

right there

perfect delivery of price

hits it here hits it here

look at the high on that candle

104 55.

104.55

the low on this candle 104 55. the buy

side all green candles up then it comes

down so this is all efficiently traded

it's a full block of delivery deficiency

up and down both ranges on both sides of

the delivery of price dubai and the

south side have been offered in here

from this low to this high

once we break this low here we're all on

sell side now

it comes right back to it here

perfect delivery efficiently

priced at 104

55

does it twice

time to sell it off and wait for it to

run the cell stops below this low

and this low down here let's just put a

line on it so you can see

right there

and

watch the delivery

boom

perfect so perfectly delivered down into

the cell stops below the low lows

so hopefully this has been a little bit

more

insights into how the liquidity pools

and liquidity voids

and fair value gaps draw together in an

overlapping

scenario but again there'll be a lot

more scenarios to outline in your pdf

file for the summer's content

so i wish you good luck and good trading