FVG vs IMB - The Best Trading Strategy?!

Summary

In this video, the speaker breaks down the differences between fair value gaps (FVG) and imbalances (IMB) in trading. While both represent open price ranges in the market, FVGs focus on buying after a market retraces into the gap, whereas imbalances require the entire price range to be filled before entering a trade. The speaker shares why they prefer trading imbalances, citing their simplicity, better risk/reward potential, and consistency compared to FVGs. Ultimately, they emphasize that both methods can work, and traders should choose the one that suits their style.

Takeaways

• 😀 Fair Value Gaps (FVG) and imbalances are both open price ranges caused by large candles with untested wicks, but they are traded differently.
• 😀 FVG trading involves entering once the market retraces into the gap, while imbalance trading waits for the entire open price range to be filled.
• 😀 FVGs can be subjective, as traders can choose different wicks to mark the gap, leading to inconsistency in trading setups.
• 😀 Imbalances are more mechanical to trade, as they are viewed in a clear and predictable manner, with a focus on waiting for the imbalance to be filled.
• 😀 One disadvantage of FVGs is poor risk-reward setups, as traders may be forced to place stop-losses in dangerous zones, reducing the profitability of trades.
• 😀 FVG traders may face risk-reward issues, especially when entering at the midpoint or low of the gap, resulting in larger stop losses or weak risk-reward ratios.
• 😀 Imbalance trading typically offers better risk-reward opportunities because entries occur at more significant retracements, ensuring better positioning and smaller stop losses.
• 😀 The market often fills the entire imbalance, making it more likely that traders will see a reversal or move toward the desired supply or demand zones.
• 😀 FVGs may lead to lower probability trades and require confirmation on lower timeframes, but even these confirmations are often unreliable in certain market conditions.
• 😀 The preference for imbalances over FVGs stems from their simplicity, predictability, and ability to generate high-reward, low-risk trades.
• 😀 Both FVGs and imbalances can be effective in trading, but the key is finding which approach aligns with a trader's personal strategy and style.

Q & A

What is the difference between fair value gaps (FVG) and imbalances in trading?

Fair value gaps (FVG) and imbalances are essentially similar as they both refer to open price ranges in the market. A fair value gap occurs when a large candle leaves untested wicks, creating a gap. Similarly, an imbalance happens when there is an open price range due to a large candle that doesn't retest the previous wick. The main difference lies in how they are traded: FVGs involve entering trades within the gap, while imbalances require waiting for the entire gap to be filled before entering a trade.

How does trading a fair value gap differ from trading an imbalance?

When trading a fair value gap, the approach is to enter the market once it retraces into the gap, typically aiming for a buy position. In contrast, with imbalances, traders wait for the entire open price range to be filled before taking any action, usually targeting areas of demand or supply for further movement.

What are the potential drawbacks of trading fair value gaps?

The main drawbacks of trading fair value gaps are subjectivity and poor risk-to-reward potential. FVGs can arise in various situations, making it harder to maintain consistency in marking them. Additionally, the risk-to-reward ratio is often unfavorable when entering trades within the gap, as stop-losses might be too large or positioned in less favorable areas.

Why does the trader prefer trading imbalances over fair value gaps?

The trader prefers imbalances because they are less subjective and provide a clearer, more mechanical approach. Imbalances involve waiting for the price to fill the entire open price range before entering a trade, which leads to better risk-to-reward setups and higher probability trades. In comparison, FVGs often lead to trades with poor risk-to-reward potential.

What is the primary challenge when trading fair value gaps?

The primary challenge when trading fair value gaps is the subjectivity involved in marking the gaps. Traders might be uncertain about where to place their FVGs, leading to inconsistencies in their trades. This subjectivity makes it harder to maintain a consistent trading strategy.

How does the risk-to-reward ratio differ between fair value gaps and imbalances?

The risk-to-reward ratio for fair value gaps is often less favorable because the stop-losses may need to be large to avoid being stopped out. For imbalances, the risk-to-reward ratio tends to be better because traders can enter at more significant retracement levels, typically around 70-80%, leading to better entries and smaller stop-losses.

What is a supply or demand zone, and how does it relate to imbalances?

A supply or demand zone is an area in the market where there is significant buying or selling pressure. For example, a demand zone is formed when buyers accumulate before pushing the price up. When imbalances are filled and price reaches a demand or supply zone, traders may look for a reversal or continuation of the trend. These zones are critical for placing trades after an imbalance is filled.

How does the trader use imbalances to identify trade opportunities?

The trader uses imbalances to find potential trade opportunities by waiting for the open price range to be filled. Once the imbalance is filled, they look for structural changes in the market, such as higher lows or higher highs, to enter trades at optimal levels. This approach is mechanical and relies on waiting for the imbalance to be completed before acting.

What is the role of confirmations when trading fair value gaps?

Confirmations in fair value gap trading involve looking for price action signals on lower timeframes within the gap to increase the probability of a successful trade. However, these confirmation trades are often low-probability and can still result in losses, especially when the market does not fill the gap fully and continues in the original direction.

What happens if a fair value gap is filled but the trade setup fails?

If a fair value gap is filled but the trade setup fails, the trader may experience a loss or need to adjust their stop-loss to account for the new price action. In many cases, the market might retest a supply or demand zone after the gap is filled, leading to a continuation or reversal that doesn't align with the FVG trade.