23:09
ICT FOR DUMMIES | Fair Value Gaps EP. 5
PB Trading
Overview
This video explains Fair Value Gaps (FVGs), which are inefficiencies or imbalances in price movements within financial markets. These gaps occur when price moves rapidly, leaving behind areas where orders were not efficiently filled. FVGs act as magnets, attracting price to re-enter these zones, where they can serve as support or resistance. The video details how to identify bullish and bearish FVGs using a three-candle pattern, emphasizing that the wicks of the first and third candles must not overlap. It also covers the concepts of FVGs being 'respected' (price reacts as expected) or 'disrespected' (price moves against the expected reaction, invalidating the FVG), and how this applies across different trading timeframes.
How was this?
Save this permanently with flashcards, quizzes, and AI chat
Chapters
- A Fair Value Gap (FVG) represents an imbalance or inefficiency in price movement.
- These imbalances occur during rapid price changes where not all orders are filled.
- Price tends to return to these inefficient areas to fill outstanding orders.
- FVGs can act as future areas of support or resistance.
Understanding FVGs helps traders anticipate potential price reversals or continuations by identifying areas where the market is likely to seek equilibrium.
A rapid price drop leaves a gap between the low of one candle's wick and the high of a later candle's wick, indicating a sell-side imbalance.
- FVGs are formed by a three-candle sequence.
- A bearish FVG (Sell Side Imbalance - SIBI) occurs when the low of the first candle's wick does not overlap with the high of the third candle's wick, signaling a move towards lower prices.
- A bullish FVG (Buy Side Imbalance - BIDI) occurs when the high of the first candle's wick does not overlap with the low of the third candle's wick, signaling a move towards higher prices.
- Overlapping wicks between the first and third candles mean there is no FVG, as there is no significant price imbalance.
Correctly identifying the type of FVG allows traders to infer the market's immediate directional bias and potential targets.
In a bullish FVG, the high of the first candle's wick is significantly higher than the low of the third candle's wick, creating a gap that price may revisit.
- Price typically moves away from an FVG, creating the imbalance.
- Price then retraces back into the FVG to fill the imbalance and complete orders.
- After interacting with the FVG, price usually continues in its original direction (higher for bullish FVGs, lower for bearish FVGs).
- FVGs act as magnets, drawing price back to these inefficient zones.
This predictable behavior allows traders to anticipate price movements and potential entry or exit points around these key levels.
A bullish FVG is formed, price trades into it, and then continues to move higher, demonstrating the FVG's role as a catalyst for further price movement.
- A 'respected' FVG means price enters the gap and reacts as expected (e.g., bounces off a bullish FVG).
- A 'disrespected' or 'invalidated' FVG occurs when price closes beyond the FVG's boundaries, particularly the body of the candle closing past the FVG.
- For a bullish FVG, disrespect means a candle body closes below its high; for a bearish FVG, it means a candle body closes above its low.
- Wicks can 'do the damage' by reaching into or through an FVG, but 'bodies tell the story' by confirming respect or disrespect upon closing.
Understanding whether an FVG is respected or disrespected provides crucial confirmation for trading strategies and helps avoid false signals.
A bullish FVG is formed, price wicks down into it, but the candle closes above the FVG's upper boundary, indicating it is respected and likely to continue bullish.
- FVGs are fractal, meaning they appear on all timeframes (e.g., 1-minute, 5-minute, hourly, daily).
- Higher timeframe FVGs help establish overall market bias, while lower timeframe FVGs can pinpoint entry points.
- New Day Opening Gaps (NDOGs) are similar imbalances that occur at the start of a trading day and typically get completely filled before price moves further.
- When analyzing an FVG, it's crucial to use the closing of the candle on the *same* timeframe the FVG occurred to determine respect or disrespect.
Applying FVG concepts across multiple timeframes and distinguishing them from other gap types enhances trading strategy robustness and accuracy.
A bullish FVG on the hourly chart aligns with bullish price action, and then a subsequent bullish FVG on the 15-minute chart provides a lower-timeframe entry confirmation.
Key takeaways
- Fair Value Gaps represent price imbalances that attract future price action.
- Identify FVGs by looking for a three-candle pattern where the wicks of the first and third candles do not overlap.
- Bullish FVGs signal potential upward price movement, while bearish FVGs indicate potential downward movement.
- Price interaction with an FVG is confirmed by the candle's close, not just its wick.
- A respected FVG suggests continuation in the expected direction, while a disrespected FVG signals a potential reversal or invalidation.
- FVG analysis should be conducted consistently on the same timeframe where the gap occurred.
- FVGs are fractal and applicable across all trading timeframes.
Key terms
Fair Value Gap (FVG)ImbalanceInefficiencySell Side Imbalance (SIBI)Buy Side Imbalance (BIDI)Bullish DisplacementBearish DisplacementRespected FVGDisrespected FVGFractalNew Day Opening Gap (NDOG)
Test your understanding
- What is the primary characteristic of a Fair Value Gap?
- How can you distinguish between a bullish and a bearish Fair Value Gap using a three-candle sequence?
- Why is it important to wait for a candle to close before determining if a Fair Value Gap has been respected or disrespected?
- How does the concept of FVGs being fractal influence trading strategies across different timeframes?
- What is the key difference between how price typically interacts with a Fair Value Gap versus a New Day Opening Gap?