How do ( FVG, OB, RB ) work?
Summary
TLDRThis video script introduces three essential tools for market analysis: liquidity, volume, and inefficiencies. It explains how these elements shape market movements and discusses the concept of Fair Value Gap, Order Block, and Rejection Block as key price action elements. The script emphasizes the importance of understanding market states, price delivery efficiency, and the manipulative nature of order blocks, providing insights into how these tools can be used for effective market analysis.
Takeaways
- 📈 Market movements can be understood through three main elements: liquidity, volume, and inefficiencies.
- 💧 Liquidity is the primary driver of the market, as it represents the presence of buy or sell orders.
- 📊 Volume reflects the amount of liquidity entering the market, indicating the flow of money.
- 🔍 Inefficiencies are graphical representations of volume at specific times, showing the impact of volume on price.
- 🧩 The market can be in a balanced or unbalanced state, affecting the dominance of buyers or sellers.
- 🔄 Efficient and inefficient price delivery are determined by the presence of buyers and sellers and the evenness of asset exchange.
- 🌐 The Fair Value Gap (FVG) is a Price Action tool indicating impulsive price reactions to zones of liquidity or inefficiency.
- 📌 FVG levels, including the 0.5 level, can be used as entry points for trading positions based on price reactions.
- 🚀 An Order Block represents a price range with high trading volume, often formed manipulatively and can trigger price reactions when tested.
- 🚫 Rejection Blocks, similar to Order Blocks, show changes in market balance and can indicate potential reversals or continuations of trends.
- 🔗 All market movements are interconnected, moving from one zone of interest to another, reflecting the 'from zone to zone' rule.
Q & A
What are the three main tools for market analysis discussed in the video?
-The three main tools for market analysis discussed in the video are the Fair Value Gap (FVG), the Order Block, and the Rejection Block.
What is the role of liquidity in the market according to the video?
-Liquidity is the sole driver of the market. Without liquidity, meaning without buy or sell orders, the market would not move.
How does volume reflect the amount of liquidity entering the market?
-Volume directly reflects the amount of liquidity entering the market, indicating how much money has entered.
What is meant by inefficiencies in the context of market movements?
-Inefficiencies are graphical representations of volume at a specific moment in time, influenced by volume on price, and are used as tools for market analysis.
What are the two main factors to consider when understanding the deep logic of inefficiencies and market movements?
-The two main factors are the state of the market at a certain point in time (balanced or unbalanced) and the efficiency of price delivery (efficient or inefficient).
What is a balanced market state and how does it affect price movement?
-A balanced market state is when the volume of buys and sells are equivalent, and the price hardly moves, indicating neither buyers nor sellers dominate the market.
What is a Fair Value Gap and how does it form in a bullish scenario?
-A Fair Value Gap is a Price Action element formed by three candles where the high of the first candle does not cover the low of the third candle, indicating an impulsive price reaction due to a surge of liquidity.
What is the significance of the 0.5 level in a Fair Value Gap?
-The 0.5 level in a Fair Value Gap is often marked as quite strong, and ideally, the price should bounce off it, which can also be used as an entry point for a position.
How does an Order Block differ from a Rejection Block in terms of formation?
-An Order Block is formed by a breakout of resistance or support levels and a close above or below it, respectively, while a Rejection Block is identified by two candles with a range of interest in the wicks, indicating a change in balance between market participants.
What is the 'from zone to zone' rule mentioned in the video?
-The 'from zone to zone' rule describes the logic that the price always moves from one zone of interest to another, such as from liquidity to inefficiency and vice versa, or from internal liquidity to external liquidity.
Why might the price react when testing an Order Block zone?
-The price might react when testing an Order Block zone due to initial positions being closed, unfilled orders after testing, and the zone itself being a balance change point attracting additional position accumulation or distribution.
How are Rejection Blocks identified on a chart?
-Rejection Blocks are identified by two candles with the area of interest being the range of the wicks of both candles. It signifies a change in market balance and can be used for analysis regardless of the wick lengths.
What is the final conclusion about inefficiencies presented in the video?
-The final conclusion is that any inefficiency on the chart represents areas where orders were left unfilled or partially filled by market participants during price movement, and it's important to analyze these to understand market dynamics.
Outlines
📈 Market Analysis Fundamentals
This paragraph introduces three key tools for market analysis: liquidity, volume, and inefficiency. It emphasizes the simplicity of market logic and how these elements interact to drive market movements. Liquidity is identified as the primary market driver, with volume reflecting the amount of liquidity entering the market. Inefficiencies are graphical representations of volume's impact on price at specific times. The paragraph also explains the market states of balance and imbalance, and the concept of price delivery efficiency, setting the stage for a deeper exploration of market dynamics.
🔍 Understanding Fair Value Gap and Order Blocks
This section delves into the specifics of the Fair Value Gap (FVG) and Order Blocks as tools for analyzing market inefficiencies. It describes the FVG as a price action element formed by three candles, indicating areas of unfilled orders and potential price reactions. The paragraph explains how FVG levels can be used for entry points and the importance of timing when testing these levels. It then introduces Order Blocks as areas of high volume trade, often manipulatively formed, and discusses how support and resistance levels are identified. The paragraph also explores the logic behind the formation of order block zones and their potential impact on market movements.
📉 The Role of Rejection Blocks in Market Analysis
The final paragraph focuses on Rejection Blocks, another tool for identifying market inefficiencies. It explains that Rejection Blocks are similar in logic to Order Blocks but are more dependent on the timeframe and the timing of candle openings and closings. The paragraph describes how Rejection Blocks are identified by the wicks of two candles and how they can indicate areas of unfilled orders or market imbalance. It also provides examples of how Rejection Blocks can be observed across different timeframes and how they relate to the concept of 'from zone to zone' market movement. The conclusion emphasizes the importance of understanding inefficiencies as areas of unfilled or partially filled orders and encourages traders to conduct their own analysis.
Mindmap
Keywords
💡Market Analysis
💡Liquidity
💡Volume
💡Inefficiency
💡Balanced State
💡Unbalanced State
💡Efficient Delivery
💡Fair Value Gap (FVG)
💡Order Block
💡Support and Resistance
💡Rejection Block
Highlights
The market analysis is simplified to three main tools: liquidity, volume, and inefficiency.
Liquidity is the sole driver of the market, essential for any market movement.
Volume reflects the amount of liquidity entering the market, indicating money flow.
Inefficiencies are graphical representations of volume's impact on price at specific times.
Market states can be balanced, with equal buy and sell volumes, or unbalanced, with one dominating.
Efficient price delivery involves an even exchange of assets between buyers and sellers.
Inefficient price delivery indicates unexecuted or partially filled orders, a sign of market inefficiency.
The Fair Value Gap (FVG) is a Price Action element showing impulsive price reactions to zones of liquidity.
FVG identifies areas with a lack of participants ready to trade, leading to unfilled orders.
FVG levels, including the 0.5 level, can be used as entry points for trading positions.
The validity of an FVG when tested depends on the context and timing of price movements.
Order blocks represent price ranges with the highest volume traded, often manipulatively formed.
Support and resistance levels indicate shifts in the balance between buyers and sellers.
Order block zones are formed by breakouts and closes above resistance or below support levels.
Rejection Blocks are similar to order blocks but depend on the timeframe and candle openings/closings.
Rejection Blocks consist of two candles where the wicks' range indicates the area of interest.
Inefficiencies on the chart represent areas with unfilled or partially filled orders by market participants.
Fractals are not considered inefficiencies as they manifest post price delivery, not during it.
Market movements are interconnected, and the 'from zone to zone' rule describes this logic.
Transcripts
In this video, I will tell you about the three main tools for market analysis that you will
need once and for all. No more patterns and unnecessary clutter that only hinder
and bring failures. I am sure you have not seen anything like this before. Let's get started.
As we already know, the logic of the market is very simple. It is based on three main elements:
liquidity, volume, and inefficiency. Any movement can be described using just these three concepts.
At the top of this chain is liquidity,
which is the sole driver of the market. Without liquidity, that is, without buy or sell orders,
the market simply would not move. It is important to understand that any element
on the chart can provide liquidity, but the question is in the quantity.
The second most important element, the foundation of all our market logic and strategy, is volume,
which directly reflects the amount of liquidity
entering the market. In other words, how much money has entered the market.
And the third element is inefficiencies, which are formed as a result of the influence of volume on
price. They are graphical representations of volume at a specific moment in time,
depending on the timeframe. Inefficiencies will be
our tools through which we will look at the chart and do our analysis.
To understand the deep logic of inefficiencies and market movements,
we need to consider two main factors.
The first factor is the state of the market at a
certain point in time. It can be of two types: balanced or unbalanced.
What does this mean? When the market is in a balanced state,
the volume of buys and the volume of sells are equivalent to each other,
and the price hardly moves. In other words, neither buyers nor sellers dominate
the market. This is very rare and mostly happens on days with very low volatility.
The second type is the unbalanced state, which is more typical for any market.
This occurs when the buy volume is greater than the sell volume, and the price rises,
or when the sell volume is greater than the buy volume, and the price falls.
We have sorted this out.
The second factor is the efficiency of price delivery, which also comes in two types.
The first type is called efficient delivery because,
in the context of a certain market movement, there are both buyers and sellers present,
allowing for a more even exchange of assets. It is important to consider that price delivery is
always an unbalanced process in which one side, either buyers or sellers, dominates.
The second type is inefficient price delivery,
which implies that the exchange of assets occurs unevenly in certain price ranges
between buyers and sellers. This means that there are places in the market where orders
remain unexecuted or only partially filled, which is a key sign of inefficient pricing.
You may have noticed that inefficient price delivery is similar to the Fair Value Gap,
which we will discuss next because it is the first and simplest tool we use.
The Fair Value Gap is a Price Action element formed by three candles where the high of the
first candle does not cover the low of the third candle in a bullish scenario,
and the low of the first candle does not cover the high of the third candle in a bearish scenario.
The logic behind this tool implies an impulsive price reaction to zones of liquidity or
inefficiency due to a surge of a large amount of liquidity into the market, which we also refer
to as volume for buying or selling. This leads to an uneven exchange of assets between the parties.
When a bullish Fair Value Gap forms on the chart,
the range where the wicks of the candles do not overlap indicates a lack of participants who
were ready to sell as much as buyers were ready to buy. In other words,
there was not enough selling volume to absorb the buying volume, resulting in unfilled buy orders.
Conversely, when a bearish Fair Value Gap forms on the chart, it means there was not
enough buying volume to absorb the selling volume in that range, leading to unfilled sell orders.
This is the main reason why, when these zones are tested,
the price often reacts and reverses in the opposite direction.
When the highs and lows of the candles overlap,
we cannot assert that a Fair Value Gap has formed, meaning the exchange of
assets between buyers and sellers was much more efficient. Hence the name Fair Value.
Now let's talk about FVG levels and the price reaction from them.
Basically, we have the upper and lower boundaries of the Fair Value Gap,
but the 0.5 level is often marked as well, which is considered quite strong and ideally,
the price should bounce off it. Therefore, it can also be used as an entry point for a position.
As for the validity of the FVG when it is tested, it is quite complex because much depends on
timing. However, in my opinion, the main thing is that the price does not close below the lower
boundary when the FVG is bullish and does not close above the upper boundary when the FVG is
bearish. This would be considered an inverted Fair Value Gap, which may indicate a continuation of
the movement. Everything else is permissible, but again, much depends on the context.
Let's look at a couple of examples on a real chart and then move on to the next tool.
A fairly simple example of a Fair Value Gap is as follows: The price performs a liquidity raid,
after which very aggressive buying volume enters the market, forming two FVG zones.
The price tests the first zone but does not receive enough volume to continue
moving further. Then the second, lower zone is tested, from which a rejection block is formed,
and the price continues to move in the direction of the trend.
In the given context, on a 1-day timeframe, two fair value gap zones have formed. We can
clearly see that each zone, after being tested on the chart, forms a new one,
and the price never closes above these zones. This means that the Fair Value
Gap has enough strength to cause the price to reverse and move in the opposite direction.
An order block is a Price Action element representing a price range where the
highest volume was traded, often formed manipulatively. Forget the assertion that
an order block is the last candle before a reversal; this has no logical basis.
First, let's note the two types of levels that form in the market for
a full understanding of this tool: support and resistance.
A resistance level is formed when there are two candles,
the first being a buy candle and the second a sell candle. Where
the first candle closes and the second candle opens is our resistance level.
A support level, in turn, is a formation where the first candle is a sell candle and the second
is a buy candle. Where the first candle closes and the second opens is our support level.
Based on basic logic, these levels represent points where the balance between buyers and
sellers shifted. This gives us reason to believe that large players opened or closed their
positions there. Therefore, there is a chance that when these levels are tested, additional
buy or sell volume may enter the market, with large players buying or selling in these spots
again. It is believed that in this way, they can protect their previously opened positions.
How is the order block zone formed?
The order block zone implies a breakout of the resistance level (buy + sell candles)
and a close above it for a bullish order block, and a breakout of the
support zone (sell + buy candles) and a close below it for a bearish order block.
Let's imagine we have a zone of liquidity or inefficiency. For the price to reach this zone,
there must be sell volume in the market pushing the price downward.
This means that someone interested in this movement must open a short position.
Upon reaching the zone of interest, two entirely different processes occur
with the same identical outcome: the price impulsively moves up.
Why does this happen?
We already covered part of this logic in the previous video, but I'll quickly recap. When
there is a liquidity zone, it means that stop losses of players who previously opened their
positions are likely located behind a certain fractal. Thus, this zone is of interest
to a large player because there are those ready to buy or sell a lot. They actively exploit this.
This logic works the same way here: the price tests the liquidity zone, activating the stop
losses of players who previously opened long positions. These are sell orders,
or sell-side liquidity, but at the same time, the large player's buy orders are activated, allowing
them to accumulate a large portion of their position here. Thus, the sell orders acted as
counter liquidity for the buy orders. The reason the price moves up impulsively is that the volume
with which the large player operates significantly exceeds the volume of everyone else combined.
When the price tests an inefficiency zone like a Fair Value Gap, it gets the primary buy volume
due to unfilled orders, often leading to a reversal in the opposite direction. It's
quite possible that these unfilled orders belong to the same large player who wants
to fill them, providing an opportunity to accumulate their position at lower prices.
This is why I believe that the order block mainly has a manipulative formation mechanism.
The same logic works in reverse for a bearish order block.
Again, the question arises: why does the price react when testing the order block zone?
There are three main reasons why this might happen.
The first and most fundamental reason is that the positions initially opened to push the
price down and formed the resistance level may still be open and even in a loss. Therefore,
it is not profitable for the large player to hold them if the anticipated price delivery
will proceed upward. When the price tests roughly the first half of the order block, short positions
are closed through buy orders, creating buy volume that pushes the price up. This can also
happen at the moment of breaking the resistance or support level, provoking an even larger impulse.
The second reason an order block might react is the same unfilled
orders after testing and the surge of liquidity into the market.
The third reason is quite interesting and has logic similar to support and resistance zones.
An order block is itself a zone where the balance between buyers and sellers changed,
or vice versa, which also draws interest for additional position accumulation or
distribution. Often, if you look at the order block from a higher timeframe,
you can see that it looks like a Rejection Block, which we will discuss later.
Let's look at several examples on a real chart.
A classic example of how a bullish order block can appear: The price tests a bearish fair value
gap from which it receives selling volume, pushing the price down with the purpose of
rebalancing the bullish FVG and conducting a liquidity raid on the equal lows. In this area,
buying volume enters the market, pushing the price back up, breaking through the resistance level,
and closing the candle with a body that forms the order block zone. This zone is then tested, and
the price reacts accordingly. It is also important to note if an FVG is formed in the order block
zone on the same timeframe or a lower one, as this provides additional confirmation of its strength.
Additionally, we can see a bearish order block: breaking through the
support level, then testing it, and continuing the downward movement.
If you observe closely, every market movement is interconnected. Sell or
buy orders from one instrument are used to create another, and so on. Therefore,
one should never forget the "from zone to zone" rule, which somewhat describes this
logic. The price always moves from one zone of interest to another, from liquidity to
inefficiency and vice versa, or from internal liquidity to external liquidity and vice versa.
The third and final tool is the Rejection Block. Its logic of operation is absolutely no different
from an order block, but the formation of this tool heavily depends on the timeframe
from which you are observing and the timing of candle openings and closings. Similarly,
there is a change in balance between market participants, and whether you are looking at
a support or resistance level, an order block, or a Rejection Block, it is essentially the
same concept but displayed differently depending on the timeframe you are viewing on the chart.
Let's understand how to identify a Rejection Block.
First, a Rejection Block consists of two candles where our area of interest will be the range of
the wicks of both candles. It does not matter which wick is longer or shorter.
If there is only one candle with a long wick,
this is considered a simple rejection and an indication of volume entering the market.
There is a probability that the subsequent candle will just continue the movement.
Secondly, it is important for the wick of the candle to sweep liquidity or rebalance
inefficiency. However, sometimes a Rejection Block closes within the area of interest;
this is also acceptable and can be used because it does not invalidate the logic of the tool.
Let's look at a couple of examples on the chart:
This is a rejection block formed on a 1-day timeframe. If we mark this zone and then
switch to the 4-hour timeframe, we can observe approximately the same area as the order block.
Another example on the 1-day timeframe, but this time with a bearish rejection block. If
we switch to the 4-hour timeframe, we again see that it resembles an order block zone.
Here, the rejection block is on the 1-week timeframe. If we switch to a smaller timeframe,
in our case 1-day, we see the exact same order block zone.
Let's make a final conclusion and put an end to the question of inefficiencies.
Any inefficiency on the chart represents areas where orders were left unfilled or
partially filled by market participants in the context of price movement,
regardless of the reason behind it.
If you wonder why fractals are not considered inefficiencies, the answer is straightforward:
orders behind fractals are a phenomenon that manifests post facto, not during price delivery.
In the end, we have:
- The Fair Value Gap is an unbalanced and inefficient element in the market
due to unfilled orders for opening positions. - Similarly, the Order Block is an unbalanced
and inefficient element in the market due to unfilled orders for closing positions.
It's important here to conduct your own analysis to understand this. You may not
necessarily agree with my opinion in order to be a profitable trader.
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