Selecting The Right Fair Value Gap To Use For Trade Entry

Summary

In this video, the trader explains how to select the most relevant fair value gaps (FVGs) when multiple options are present on a chart. Key factors include filtering FVGs based on the premium zone, identifying high-probability entries using confluence, and confirming a market structure shift before making a trade. The trader emphasizes risk management by using smaller stop losses and highlights the importance of patience and precision when analyzing price action. This approach aligns with ICT strategies, helping traders navigate imbalances in price and predict market direction effectively.

Takeaways

• 😀 Fair Value Gaps (FVGs) are imbalances in price action where liquidity is missing, and these gaps need to be filled before the price continues in the trend.
• 😀 Multiple FVGs on a chart can be overwhelming, and it’s important to filter out irrelevant ones by considering whether they lie in the Premium or Discount zone.
• 😀 The Premium zone is above the equilibrium of the price range, and FVGs in this zone are more significant than those in the Discount zone.
• 😀 Confluence is a key concept — the combination of multiple reference points (such as FVGs, order blocks, or mitigation blocks) increases the probability of successful trades.
• 😀 To identify high-probability FVGs, consider whether an FVG coincides with other important price levels like lows or highs.
• 😀 When analyzing price movement, wait for a clear retracement and a market structure shift to confirm that the price will continue in the trend direction.
• 😀 A three-candle pattern, where each subsequent candle closes above the previous one, can help confirm that a retracement is in place and that it is a valid entry point.
• 😀 Traders should avoid using FVGs in the Discount zone as they may lead to deceptive price action, putting you at risk of being induced by liquidity grabs.
• 😀 Using lower timeframes (such as the 1-hour or 15-minute charts) helps to refine your entry by waiting for a market structure shift to signal a potential reversal.
• 😀 Stop loss placement is critical; instead of using large stop losses that might get triggered by price fluctuations, consider using more precise levels based on the market structure shift.
• 😀 In practice, look for FVGs in the Premium zone and evaluate whether they align with other reference points (like lows or mitigation blocks) to determine the best entry.

Q & A

What is a Fair Value Gap (FVG) in trading?

A Fair Value Gap (FVG) is a price imbalance or liquidity void that occurs when the market moves too quickly in one direction, leaving behind an area with insufficient buyers or sellers to balance the price action. This imbalance creates a gap that traders can potentially target when the market retraces to 'fill' this gap.

How do you determine which Fair Value Gap (FVG) to use for a trade?

To determine which FVG to use, you first need to identify if it is in a premium or discount area. FVGs above the equilibrium point of a price range are in the premium area and are typically preferred, while those below the equilibrium are in the discount area and should be avoided. Additionally, FVGs with confluence, meaning they align with other institutional reference points like lows, order blocks, or mitigation blocks, are considered higher probability setups.

What is the significance of the 'equilibrium' point in FVG selection?

The equilibrium point is the midpoint of a price range. FVGs above this midpoint are considered in the premium area, while those below it are in the discount area. The premium area is where you should focus when selecting FVGs because they are typically more reliable for trade setups, whereas discount areas can lead to deceptive price action.

What does 'confluence' mean in the context of FVGs?

Confluence refers to the alignment of multiple institutional reference points at the same price level, such as a low point coinciding with an FVG. When an FVG has confluence, it increases the probability of the market respecting that price level and reversing in the direction you want to trade.

Why should traders avoid using FVGs in the discount area?

FVGs in the discount area are more likely to be deceptive, trapping traders into false moves. These gaps may lead to poor setups where price moves against the trader, as they might become liquidity for the market. Focusing on FVGs in the premium area helps avoid this risk.

How can you confirm that a retracement is occurring in the market?

To confirm that a retracement is occurring, wait for three consecutive candles to print in the opposite direction of the initial move. These candles should close above each other, signaling that the market is shifting direction and that a retracement is taking place.

What role does market structure play in identifying the right FVG?

Market structure plays a key role in confirming whether a retracement is valid. After identifying the FVG and waiting for the price to reach it, you need to look for a shift in market structure on a lower time frame. A shift in market structure indicates that the market has completed its retracement and is ready to move in the desired direction.

What is the purpose of using lower time frames for entry confirmation?

Using lower time frames allows traders to better confirm market structure shifts and refine their entry points. When a high-probability FVG is reached, a shift in market structure on a lower time frame can validate the reversal, making the trade setup more reliable and providing a safer stop-loss level.

How should traders set their stop-loss when trading based on an FVG?

Traders should set their stop-loss just below the FVG or a market structure point that provides the best protection. Instead of using a wide stop-loss that encompasses the entire gap, a smaller stop-loss based on market structure shifts helps manage risk and ensures better risk-to-reward ratios.

What does the 'unicorn entry model' refer to in this context?

The 'unicorn entry model' refers to a trade setup where there is confluence between a low point and an FVG, creating a high-probability entry. This model is particularly useful when combined with other institutional reference points, making it a reliable strategy for identifying entry points in the market.