ICT Mentorship Core Content - Month 04 - ICT Vacuum Block

Summary

In this video, the concept of a 'vacuum block' in price action trading is explored, focusing on how gaps form due to volatility events like economic releases or geopolitical events. The video explains how these gaps create an absence of liquidity, leading to potential market behavior patterns. By examining the gap's structure, traders can identify opportunities for entering or exiting positions based on price delivery and liquidity closure. Key concepts include bullish and bearish order blocks, gap filling, and the idea of breakaway gaps, offering traders a framework to anticipate future price movements.

Takeaways

• 😀 A bullish vacuum block is a gap created in price action due to a volatility event, such as a major economic release or geopolitical event.
• 😀 A gap in price action, especially during news events like non-farm payroll or an FOMC release, can lead to a vacuum of liquidity.
• 😀 The absence of trading between the two candles surrounding the gap creates a vacuum of liquidity, which can eventually lead to the market attempting to fill the gap.
• 😀 Gaps often occur during significant events such as non-farm payroll or major market sessions like the New York session or FOMC announcements.
• 😀 Traders generally expect gaps to eventually fill, but the market may not always close the gap completely, depending on the situation.
• 😀 When a gap is created, traders should assess the potential for the price to either continue moving away from the gap or retrace and close it.
• 😀 A bullish order block, or a previous down candle before the gap, can create a potential buy area where the market might bounce, leaving the gap open.
• 😀 If price closes the gap fully, it indicates that the market has balanced out the liquidity and may continue to move higher.
• 😀 Risk management is crucial when trading gaps—traders need to define their risk between the reference points of the gap's candles.
• 😀 The behavior of the market post-gap depends on the time of day, as early New York sessions are more likely to fill gaps than later sessions.
• 😀 A breakaway gap that doesn't fill entirely can be a sign of market strength, suggesting a bullish continuation if it occurs in an uptrend.

Q & A

What is a bullish vacuum block in price action?

A bullish vacuum block is a gap in price action created by a volatility event, where there is a vacuum of liquidity. This gap can occur due to major events like non-farm payroll releases or a session open in futures trading, and it represents a breakaway gap in price where no trades occur between the previous candle's close and the next candle's open.

How does the market typically behave after a gap up due to a volatility event?

After a gap up due to a volatility event, most traders initially expect the market to continue moving higher. However, the market may also attempt to fill the gap by trading back into it before continuing in the direction of the gap.

What is the key assumption when a gap occurs in price action?

The key assumption is that the market may want to come back and close the gap created by the volatility event, as there was no trading in that range. Traders often anticipate that the gap will eventually be filled or balanced.

Why is the absence of trading between the gap important for understanding price action?

The absence of trading between the gap means that there is a lack of liquidity in that price range. This absence makes it an important reference point for traders, as they need to assess whether the market will fill the gap or continue in the direction of the gap.

What is a bullish order block and how does it relate to gap filling?

A bullish order block is a down candle or series of down candles that occur before a bullish move. When a gap forms, traders look for bullish order blocks within the gap. If the price trades back into the order block, it can indicate a potential bounce, and the gap may not be completely filled.

What role does time of day play in how a gap is filled?

Time of day is crucial in determining whether a gap will fill. If the gap occurs early in the trading day (e.g., during the New York session), the market has more time to potentially fill the gap. Gaps formed late in the session, especially in the afternoon, are less likely to fill within the same trading day.

What happens if the gap remains open after trading hours?

If the gap remains open after trading hours, it may be classified as a fair value gap, and traders may look for price to eventually fill it in later. This could indicate a more prolonged price move, and the gap may represent a breakaway gap with strong bullish or bearish sentiment.

What is meant by a 'fair value gap'?

A fair value gap occurs when there is a gap that has not been filled within the current trading session. It represents a price range where the market may revisit later to complete the price delivery and fill the gap, often showing an opportunity for future trading.

How do traders manage risk when entering trades based on gap analysis?

Traders manage risk by identifying key reference points within the gap, such as the last up or down candle before the gap. For a buy setup, they would place a stop loss below the lowest point of the reference candle, and for a sell setup, they would use similar principles. The key is defining a manageable risk-to-reward ratio based on the gap's structure.

What does it mean when price 'completes' a gap?

When price 'completes' a gap, it means that the market has traded back into the gap and filled the entire range between the gap's high and low. This completes the price delivery, and traders may then expect the market to continue in the direction of the initial gap, especially if it has efficiently balanced the liquidity.