Identify Best Fair Value Gaps | Advanced FVG

Summary

This video provides an in-depth guide to identifying high-quality fair value gaps in trading. It covers the basics of fair value gaps, explains how price reacts to these gaps, and emphasizes the importance of consistent order flow. The video introduces techniques like candle cutting, identifying overlaps, and using shelves to predict price movements. It also highlights common misconceptions and mistakes when analyzing gaps, including invalid formations and premature reactions. Viewers are taught how to accurately assess potential rejection points and optimize entry, stop-loss, and take-profit strategies for better trading outcomes.

Takeaways

• 😀 A fair value gap (FVG) occurs when there is an imbalance in the market where the wicks of the candles don't connect, creating an empty space.
• 😀 FVGs are more reliable when the market has a consistent, one-directional order flow (e.g., all bullish candles).
• 😀 A shift in order flow, such as a bearish candle among bullish candles, invalidates an FVG and suggests a potential change in market direction.
• 😀 The concept of 'overlapping' is crucial for determining where price is likely to react within the FVG, typically at the shelf (swing high or low).
• 😀 When setting entries, stop-losses, and take-profits, the Fibonacci (FIB) retracement levels can be useful for identifying discounted and premium levels.
• 😀 The stop-loss should be placed at the top of the gap to protect against price filling the gap and making a minor pullback before continuing in the expected direction.
• 😀 A clean, unvisited FVG (without prior price reaction) is more likely to hold, whereas if price has already reacted at that level, the gap becomes invalid.
• 😀 Invalid FVGs can also arise if there is inconsistent order flow, such as a bearish candle breaking up a series of bullish candles.
• 😀 When price approaches a previously reacted level in an FVG, it is less likely to hold, and the gap will likely be filled or targeted for liquidity.
• 😀 Price should ideally come to the FVG directly and reject without making a small rejection at an earlier point in the gap, which could invalidate the setup.

Q & A

What is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) is a market imbalance where the price has not yet balanced, represented by an empty gap between candle wicks that don’t connect. The price tends to return to this gap in search of balance.

Why do Fair Value Gaps hold better when the order flow is one-directional?

Fair Value Gaps hold better in a one-directional order flow because they are formed in a trend with consistent market movement. When the market is moving in one direction (bullish or bearish), these gaps are more reliable for price action, as opposed to mixed order flows that are less predictable.

What happens when there is an inconsistent order flow in a Fair Value Gap?

If there is an inconsistent order flow, such as a bearish candle followed by bullish candles, the Fair Value Gap becomes invalid. This is because the market is no longer moving in a single direction, which weakens the reliability of the gap.

How do you identify the highest quality Fair Value Gaps?

The highest quality Fair Value Gaps are identified by checking the order flow consistency and finding clear gaps where candles overlap. The gaps formed during strong directional movements are considered higher quality.

What is the significance of the 'shelf' in relation to a Fair Value Gap?

A 'shelf' refers to a swing low and a swing high before the price breaks. It helps to define where a Fair Value Gap is likely to react, with price tending to reject at these levels as they indicate zones of liquidity or interest.

How can you determine where price will reject inside a Fair Value Gap?

You can determine the rejection point within a Fair Value Gap by identifying the 'shelf,' which is marked by the previous swing high and low. This shelf helps predict where price will likely react.

Why is it important to place a conservative stop loss at the top of a Fair Value Gap?

Placing a conservative stop loss at the top of the Fair Value Gap helps mitigate risk. If the price fills the gap and moves past it, the stop loss prevents excessive losses while allowing the trade to potentially capture profits if the price moves back into the gap or reverses.

What happens if price already reacted from a Fair Value Gap previously?

If price has already reacted from a Fair Value Gap, the gap becomes less valid. A subsequent return to this gap might result in price continuing in the opposite direction, as the reaction from this level has already occurred.

What does it mean if price fails to react from a Fair Value Gap and moves on to a different level?

If price fails to react from a Fair Value Gap and moves past it, this suggests the gap is not a significant point of interest, and the market may continue its movement, potentially targeting the next order block or liquidity level.

What should you look for when identifying a 'perfect' Fair Value Gap?

A 'perfect' Fair Value Gap should have a consistent order flow (all bullish or all bearish candles), a clear shelf for price reaction, and minimal previous interaction with that gap. The gap should also provide an opportunity for a price reversal or continuation after reaching the shelf.