Fair Value Gap + Liquidity = Profit | Best Fair Value Gap Trading Plan in 2025!

Summary

In this video, the concept of Fair Value Gaps (FVGs) in trading is thoroughly explained, focusing on how traders often misuse them. The video covers the formation, types, and psychological reasons behind FVGs, and presents strategies to identify high-quality setups with higher success rates. It highlights the importance of mechanical, repeatable rules in using FVGs and provides two top trading setups to apply to any chart. The video emphasizes the value of understanding the core reasons behind FVGs and shows how to use them effectively in both bullish and bearish markets for profitable trades.

Takeaways

• 😀 Fair value gaps (FVGs) are powerful but misunderstood trading tools that every serious trader should master before placing trades.
• 😀 FVGs form when price moves rapidly without significant pullbacks, leaving behind gaps in price action, which often get filled over time.
• 😀 Three types of price inefficiency are: fair value gaps (FVGs), volume imbalances, and opening gaps, each with distinct characteristics and behaviors.
• 😀 A classic FVG is formed by a strong move in one direction, followed by a gap where price may return to rebalance the zone before continuing the trend.
• 😀 Inversely violated FVGs act as support or resistance when price breaks through them, transforming their role and providing new trading opportunities.
• 😀 Key levels within an FVG include the premium high, the discount low, and the midpoint (consequent encroachment), with the midpoint being the most critical level.
• 😀 FVGs formed during 'kill zones' (such as during key market hours) are more reliable and statistically more likely to lead to successful trades.
• 😀 High-quality FVGs are unmitigated, meaning they have not been filled by price yet. Once filled, these zones lose their trading relevance.
• 😀 FVGs formed at market extremes have higher priority, as they align with optimal trade entries, offering better risk-to-reward ratios.
• 😀 Effective trading strategies based on FVGs include liquidity sweep patterns, where price clears out liquidity before filling the gap and resuming the trend.

Q & A

What is a fair value gap (FVG)?

A fair value gap (FVG) is a price void formed when there is inefficient price delivery, often caused by rapid price movement in one direction without significant pullbacks. It usually appears as a gap between candlesticks and acts like a magnet for price, which tends to revisit and fill or rebalance these gaps over time.

What are the three types of price inefficiency in trading?

The three types of price inefficiency are: 1) Fair Value Gap (FVG), which occurs when there is a price void between candlesticks, 2) Volume Imbalance, which is a gap between the closing price of one candle and the opening price of the next, and 3) Opening Gap, which occurs between the previous day's close and the current day's open with no candles in between.

How does market psychology influence fair value gaps?

Fair value gaps are formed due to market psychology, where traders' behavior creates liquidity pools. Many traders place buy orders around key zones like demand areas or the FVG itself, and as these orders accumulate, they create liquidity that the market will target. This is why price often revisits and fills the FVG, as it seeks to rebalance the liquidity.

What is the difference between a classic and an inversed fair value gap?

A classic FVG is one that respects the gap and often gets filled or rebalanced by price. An inversed FVG occurs when price breaks through the original FVG, flipping its role to become a new support or resistance zone, similar to the behavior of supply and demand zones.

What is the most important level within a fair value gap?

The most critical level within a fair value gap is the consequent encroachment, which is the 50% midpoint of the gap. If price returns to this level and respects it, it signals a high probability of price continuing in the original direction.

What makes an FVG high quality?

A high-quality FVG meets several criteria: it should form within a kill zone (specific time window), it should appear during a break of market structure or a shift, it must be unmitigated (untouched by price), and it should be located at market extremes (discount zone in a bullish market and premium zone in a bearish market).

What role does liquidity play in fair value gaps?

Liquidity plays a crucial role in fair value gaps as the market seeks to fill these gaps by targeting liquidity pools. When price revisits an FVG, it taps into pending buy or sell orders within the gap, rebalancing the inefficiency and continuing the price trend with renewed strength.

How do you identify a high-probability trade using fair value gaps?

To identify high-probability trades, focus on FVGs formed during key times (e.g., London or New York kill zones), those created during a market structure shift, and those that have not been mitigated (untouched by price). Additionally, focus on FVGs at market extremes to maximize risk-to-reward potential.

How does the liquidity sweep pattern enhance FVG trading strategies?

The liquidity sweep pattern enhances FVG trading strategies by clearing out liquidity near a key support or resistance level just before price fills an FVG. This creates a strong reaction zone, as it removes opposing market pressure, allowing the price to move decisively toward the next liquidity pool in the direction of the trend.

Can an inversed FVG be used as a trading strategy?

Yes, an inversed FVG can be used as a trading strategy. When price violates a bullish FVG, turning it into resistance, it offers a high-probability shorting opportunity. By combining the FVG with liquidity sweep patterns and structure shifts, traders can make precise entries at key levels like the consequent encroachment.