How To Master Fair Value Gaps + LIQUIDITY Like a PRO | Full Guide

Summary

This video dives into the powerful yet often misunderstood concept of fair value gaps (FVGs) in trading. It explains how these price inefficiencies, caused by sudden price movements, create opportunities for high-probability trade entries. The video covers different types of FVGs, their psychological and structural importance, and provides clear rules for spotting high-quality setups. With a focus on practical strategies, including liquidity sweeps and inverse FVGs, the content equips traders with effective techniques for successful trading across various markets. Viewers are guided step-by-step, enhancing their ability to capitalize on these powerful tools.

Takeaways

• 😀 FVGs (Fair Value Gaps) are price inefficiencies formed when there's a strong price move without a pullback, creating gaps that often attract price back to them.
• 😀 FVGs are high-probability areas for potential trades, as price often revisits them to rebalance and fill the gaps.
• 😀 There are three types of price inefficiencies: Fair Value Gaps, Volume Imbalances, and Opening Gaps, each offering different opportunities for trade setups.
• 😀 The classic FVG model has two key types: buy-side imbalance (gap forms during strong upward moves) and sell-side imbalance (gap forms during strong downward moves).
• 😀 The midpoint (Consequent Encroachment) of an FVG is crucial as it represents a key level for market direction and can determine if the trend will continue or reverse.
• 😀 Inverted FVGs occur when price breaks through an FVG, causing the gap to act as a new support or resistance zone.
• 😀 High-quality FVGs form during key trading sessions (kill zones) and when market structure shifts, making them more reliable for trade entries.
• 😀 Unmitigated FVGs (those not yet filled) have the highest trade potential; once mitigated, they lose their edge as a setup.
• 😀 FVGs positioned at market extremes (top or bottom of swings) are typically more reliable than those in the middle of a trading range.
• 😀 Liquidity sweep strategies, when combined with FVGs, work exceptionally well—liquidity sweeps before an unmitigated FVG often signal strong directional movements.
• 😀 Inversed FVGs, formed when price breaches a standard FVG, can flip their function from support to resistance (or vice versa) and provide strong trade setups when combined with market structure shifts.

Q & A

What is a fair value gap (FVG) in trading?

A fair value gap (FVG) is a price inefficiency that forms on a chart when the market experiences an unbalanced price movement, usually due to a strong surge in one direction with no meaningful pullback. This leaves behind zones where liquidity was skipped, often seen as gaps between candles. These gaps act like magnets, drawing price back to them over time.

What are the three forms of price inefficiency?

The three major forms of price inefficiency are: 1) Fair Value Gaps (FVGs), which occur when the wicks of candles on either side of a middle candle don’t fully overlap; 2) Volume imbalances, which happen when there’s a discrepancy between the close of one candle and the open of the next; and 3) Opening gaps, which occur when there’s a gap between a market's previous close and the next session's open.

How does psychology play a role in fair value gaps?

Traders often miss the initial impulsive move and wait for a pullback. They place buy limit orders around key areas, such as demand zones or the FVG itself. These pending orders create a pool of liquidity inside the gap, and since the market seeks liquidity to fuel its next move, it gravitates back toward these gaps. Once the gap is rebalanced, price often continues in the direction of the trend.

What are the two major models of fair value gaps?

The two major models of fair value gaps are the classic model and the inverted model. The classic model includes 'buy side imbalance, sell side inefficiency' and 'sell side imbalance, buy side inefficiency.' The inverted model occurs when price fails to respect a standard fair value gap, causing it to flip roles and act as a support or resistance level.

What are the three critical price points within a fair value gap?

The three critical price points within a fair value gap are: 1) The premium high (top of the gap), 2) The discount low (bottom of the gap), and 3) The midpoint (consequent encroachment), which represents the 50% level of the fair value gap.

Why is the midpoint of a fair value gap significant?

The midpoint of a fair value gap is the most significant because if price revisits the gap and respects this midpoint, it often signals that price will continue in its original direction. If price breaks through the midpoint without rejection, the gap's imbalance is likely invalidated, and price may reverse direction.

What is an inverse fair value gap?

An inverse fair value gap occurs when price fails to respect a standard fair value gap and breaks straight through it. This flip causes the original gap to act as a support or resistance level, depending on the breakout direction. This concept mirrors supply and demand zones, where a broken supply zone can become demand and vice versa.

How can fair value gaps be used in high probability trading setups?

To identify high probability FVGs, traders should look for gaps that form within key trading sessions (kill zones), during market structure breaks or shifts, that remain unmitigated (untouched by price), and are positioned at market extremes. These setups have the highest likelihood of success and align with institutional price action.

What is the liquidity sweep strategy in fair value gap trading?

The liquidity sweep strategy involves price taking out a key sellside liquidity level, such as the lows of a demand zone, and then tapping into an unmitigated bullish FVG. After the gap is filled, price typically reverses and continues in the direction of the prevailing trend. This setup works well because it clears out liquidity voids and stop-loss orders, enabling strong directional movement.

How can an inverse fair value gap be traded effectively?

To trade an inverse fair value gap effectively, wait for price to breach the gap and act as resistance, typically after a liquidity sweep. Once the gap is violated, it flips its role to resistance, providing a reliable entry point for a bearish trade. Traders can place sell limit orders at the lowest point of the inverse gap and target sellside liquidity.