Complete Fair Value Gap Guide ( Noob To Expert )

Summary

This video delves into the concept of Fair Value Gaps (FVGs) in trading, explaining how these gaps form when the market moves in one direction, leaving an imbalance. The script highlights how traders can identify and trade these gaps, using examples to show when to enter or exit trades. It also introduces the Shelf SL concept, emphasizing the importance of overlapping Fair Value Gaps and Shelf levels to refine entries and stop-loss placements. By combining these strategies, traders can increase their chances of success and optimize risk-reward ratios.

Takeaways

• 😀 Fair Value Gaps (FVG) are created when there is an imbalance in the market, visible as a gap between candles. These gaps indicate areas where price might revisit, expecting a reaction.
• 😀 Not all Fair Value Gaps are tradable; it is important to filter and identify the significant ones that will have a meaningful price reaction.
• 😀 A bullish or bearish trend can be influenced by the presence of Fair Value Gaps and Shelf SL bases, which are areas where buy or sell orders were injected during consolidation or market movement.
• 😀 Fair Value Gaps occur when the high of one candle and the low of another do not overlap, leaving an empty space. These gaps can offer entry points when price revisits them.
• 😀 Shelf SL bases are areas marked by a swing high and low, showing where major orders were placed before a market expansion. These areas are key to predicting market reactions.
• 😀 Combining Fair Value Gaps with Shelf SL bases can help to optimize entry points and make stop-loss placements tighter, increasing trading efficiency.
• 😀 To enter a trade effectively, one should focus on specific areas within the Shelf, either on the macro or micro scale, depending on the market structure.
• 😀 Price can return to a Fair Value Gap area, fill it, and then move further in the direction of the prevailing trend, making it important to manage trades effectively to minimize risk.
• 😀 A Fair Value Gap is considered mitigated once price revisits and fills the gap. After the gap is closed, a stop-loss above the area can trigger a potential reversal or continuation of the trend.
• 😀 In trading, always align your Fair Value Gap entries with the overall market trend. Trading against the trend without strong evidence of a reversal could lead to substantial losses.

Q & A

What is a fair value gap and how is it identified?

A fair value gap occurs when there is an imbalance in the market, where a gap exists between consecutive candles, showing a one-sided market delivery. It's identified when the low of one candle and the high of the next don't overlap, leaving a space or gap.

How can one expect a reaction from a fair value gap?

When price revisits a fair value gap, you can expect a reaction as the market often fills the gap, which leads to either a continuation or reversal of the trend.

Why are some fair value gaps not worth trading?

Not all fair value gaps are worth trading because some might already have been mitigated (filled), or they may not align with significant market structures, reducing their potential to deliver a profitable reaction.

What is a 'shelf' in trading, and how does it affect market reactions?

A shelf is a price range between a swing high and swing low where buy or sell orders are likely accumulated. When price revisits this range, it often leads to a reaction, as it reflects where liquidity was injected into the market.

What is the purpose of combining a fair value gap with a shelf?

Combining a fair value gap with a shelf helps refine trade entries and manage risk. By tightening the stop loss and targeting a more precise entry, it improves the risk-reward ratio, offering better chances of success.

What does 'mitigated' mean in the context of fair value gaps?

'Mitigated' means that the fair value gap has already been filled or closed by the market, reducing its effectiveness as a trading signal since it no longer represents an imbalance.

How does the overall market trend (bullish or bearish) affect the validity of a fair value gap?

The direction of the broader market trend (such as bullish or bearish) affects the validity of a fair value gap. A gap that opposes the primary market trend is less likely to hold, as price typically follows the flow of the dominant trend.

What is the significance of a 'stop hunt' in trading fair value gaps?

A stop hunt occurs when price revisits and closes a fair value gap, triggering stops placed above the gap. Once liquidity is taken, price may move in the opposite direction, providing an opportunity to enter the market.

How do you identify the most effective fair value gaps for trading?

The most effective fair value gaps are those that occur near a shelf and are not mitigated. Additionally, aligning the gap with the overall market trend increases the likelihood of a successful trade.

What role does a time frame play in trading fair value gaps?

The time frame used to identify a fair value gap is crucial for its effectiveness. A lower time frame might provide quicker reactions, but larger time frames typically offer more reliable setups as they reflect more significant market moves.