The Ultimate Guide to Fair Value Gaps: Inversed Fair Value Gap (IFVG) Trading Strategy Explained!

Summary

In this episode of Smart Risk, we dive into advanced trading concepts focused on fair value gaps (FVGs). The video explains regular and inversed FVGs, their psychology, and their critical role in identifying profitable entry points. Viewers learn how price reacts to FVGs, why they tend to fill, and how these gaps can be leveraged for higher win rates in trading. A powerful trading plan centered around inversed FVGs is also shared, with detailed examples on real charts. This video is a must-watch for traders looking to master FVGs and enhance their trading strategies.

Takeaways

• 😀 Fair value gaps (FVGs) are crucial for identifying market inefficiencies and can guide effective entry points for trading.
• 😀 FVGs are typically formed when price moves quickly in one direction, leaving behind liquidity voids that smart money aims to rebalance.
• 😀 A classic fair value gap consists of a three-candle sequence, where the upper and lower wicks of neighboring candles do not fully overlap the body of the middle candle.
• 😀 Bullish FVGs occur when there are not enough sell orders to fill executed buy orders, while bearish FVGs happen when there aren't enough buy orders to fill executed sell orders.
• 😀 The psychology behind FVGs involves the accumulation of pending buy or sell orders in the gap zone, which attracts price back to fill these voids.
• 😀 The market tends to return to fill fair value gaps, offering great trading opportunities as the price moves back to these imbalances before continuing its momentum.
• 😀 Fair value gaps are categorized into two models: BC (buy-side imbalance, sell-side inefficiency) and CB (sell-side imbalance, buy-side inefficiency).
• 😀 The most important level within an FVG is the consequent encroachment (50% level), which acts as a key support or resistance level.
• 😀 Inversed fair value gaps occur when a price breaks through a gap, changing its characteristics and often acting as a new support or resistance zone.
• 😀 To trade inversed FVGs, you can set entry points at key levels within the gap, such as the consequent encroachment, and target liquidity on the opposite side of the market.

Q & A

What is a fair value gap (FVG) and why is it important in trading?

A fair value gap (FVG) occurs when there is inefficient price delivery in the market, typically caused by rapid price movement in one direction. It leaves liquidity voids that the market seeks to rebalance. Fair value gaps are crucial because they can indicate areas where prices are likely to return, providing potential entry points for traders.

What is the psychology behind fair value gaps?

The psychology behind fair value gaps is that sharp price movements often leave behind unfilled buy or sell orders. Traders place orders hoping the price will return to those levels, creating a liquidity pool. The market tends to return to fill these gaps, making them attractive for traders to capitalize on.

What is the role of 'smart money' in the formation of fair value gaps?

Smart money refers to institutional or experienced traders who execute large orders in a short period. These quick moves create an imbalance between buying and selling orders, resulting in fair value gaps. These gaps are created when the market moves too fast to offer enough orders in the opposite direction, leaving unfilled buy or sell orders behind.

How are fair value gaps categorized?

Fair value gaps are categorized into two types: BC (buy-side imbalance, sell-side inefficiency) and CB (sell-side imbalance, buy-side inefficiency). BC forms when price moves quickly upward without offering enough sell orders, while CB occurs when price moves downward without enough buy orders.

What is the significance of the consequent encroachment (CE) level in fair value gaps?

The consequent encroachment (CE) is the 50% midpoint of a fair value gap and is considered the most important level. When the price returns to this level, it can act as a strong support or resistance. Traders often use this level to identify potential price reversals or continuations.

What is an inversed fair value gap?

An inversed fair value gap occurs when the price breaks through a fair value gap, disrespecting it. This breach causes the gap to switch characteristics, often transforming from a resistance area into a support area, or vice versa, depending on the direction of the breakout.

How can inversed fair value gaps be used in trading?

Inversed fair value gaps can be used as potential areas of support or resistance. When price breaks through a fair value gap, the gap often becomes a key zone for price to return to, offering traders the chance to enter a trade based on this new support or resistance level.

How does the market react to inversed fair value gaps after a breakout?

After a breakout through a fair value gap, the market may return to the gap zone, respecting the consequent encroachment level. If the price respects this level, it often continues in the direction of the breakout. This behavior is crucial for traders to watch for potential trade entries.

What are the two entry methods for trading using an inversed fair value gap?

The two entry methods are: 1) placing a sell limit order at the lowest point of the inversed fair value gap, and 2) placing an entry at the consequent encroachment (50% level) of the inversed fair value gap. The latter provides a higher risk-to-reward ratio, as it targets the middle of the gap.

How can traders use fair value gaps and inversed fair value gaps in different time frames?

Traders can use fair value gaps in both higher and lower time frames by identifying liquidity imbalances and potential price reversals. In higher time frames, gaps provide an overall market direction, while in lower time frames, inversed fair value gaps can help identify precise entry points for trades.