12:40
Boot Camp Day 16: FVG Pt. 2
TJR
Overview
This video explains how to identify Fair Value Gaps (FVGs), also known as liquidity voids or imbalances, in financial markets. FVGs are areas where price moved quickly, leaving a gap due to a lack of opposing orders. The video details the three-candle pattern used to spot FVGs, emphasizing that they are primarily used for continuation trades in the direction of the trend, not for reversals. It also stresses the importance of waiting for confirmation and a reaction from price at the FVG before entering a trade, as not all identified gaps will lead to profitable outcomes. The homework assignment involves identifying 10 FVGs on a chosen trading pair.
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Chapters
- Fair Value Gaps (FVGs), liquidity voids, and imbalances represent areas where price moved rapidly due to a lack of resting buy or sell orders.
- Price tends to revisit these gaps because the imbalance creates an opportunity for market participants to enter trades.
- FVGs are primarily tools for identifying continuation entries during retracements within a trend, not for predicting market reversals.
- In an uptrend, look for bullish FVGs to enter long positions on a retracement; in a downtrend, look for bearish FVGs to enter short positions.
Understanding what FVGs are and why price revisits them is crucial for anticipating potential trading opportunities and understanding market dynamics.
Price moves rapidly in one direction, leaving a void where there were no opposing orders, which the market will likely return to fill.
- A Fair Value Gap is typically identified using a three-candle pattern.
- For a bullish FVG, look for a strong bullish candle (candle 2) that creates a gap between the wick of the first candle and the wick of the third candle.
- The FVG area is measured from the top of the first candle's wick to the bottom of the third candle's wick for bullish gaps.
- For a bearish FVG, the measurement is from the bottom of the first candle's wick to the top of the third candle's wick.
Learning to recognize the specific three-candle structure allows traders to pinpoint precise areas on the chart where an FVG has formed.
A large bullish candle (candle 2) is sandwiched between two smaller candles, where the lower wick of candle 1 and the upper wick of candle 3 do not overlap with candle 2's body, creating a measurable gap.
- After a break of structure confirming a bullish bias, a large bullish candle creates a bullish FVG.
- Price then retraces back into this FVG, consolidates, and continues its upward movement, demonstrating a successful trade setup.
- Similarly, in a bearish scenario confirmed by a break of structure, price retraces into a bearish FVG and continues lower.
Seeing concrete examples on charts helps solidify the understanding of how FVGs appear and function in real trading scenarios.
A chart shows a break of structure, followed by a large bullish candle creating an FVG, and then price pulling back to fill that FVG before rallying higher.
- FVGs appear frequently on charts, making it easy to overuse them.
- It is critical to wait for confirmation of a reaction at the FVG before entering a trade; do not trade solely because price has entered an FVG.
- Confirmation can include a specific candle formation (bullish or bearish) or a break of structure on a lower timeframe.
- Not all FVGs are valid or will result in a profitable trade; patience and waiting for clear signals are essential.
Understanding the need for confirmation prevents premature entries and helps traders avoid taking trades that are unlikely to succeed, improving overall trading discipline.
A trader sees price enter an FVG but waits for a strong bullish candle to form within the gap before entering a long position, rather than entering immediately as price touches the gap.
- An invalid FVG occurs when the wicks of the first and third candles overlap or fill the body of the second candle, indicating that liquidity was present.
- The presence of wicks within the FVG area suggests that resting orders were filled, negating the imbalance.
- The homework assignment is to identify 10 FVGs on a chosen trading pair and outline a hypothetical trading strategy for each.
- A key part of the homework is also to identify and understand why certain potential FVGs are actually invalid.
Learning to distinguish between valid and invalid FVGs is crucial for filtering out noise and focusing on the high-probability trading setups.
A pattern that looks like an FVG is disregarded because the wicks of the surrounding candles clearly overlap the large middle candle's body, showing no true liquidity void.
Key takeaways
- Fair Value Gaps represent areas of imbalance where price is likely to return.
- FVGs are primarily used for continuation trades in the direction of the prevailing trend.
- A three-candle pattern, defined by specific wick measurements, is used to identify FVGs.
- Always wait for price reaction and confirmation before entering a trade based on an FVG.
- Not all apparent FVGs are valid; look for clear gaps without overlapping wicks.
- Patience is essential, as FVGs are abundant and not all will lead to profitable trades.
- Understanding invalid FVGs is as important as identifying valid ones.
Key terms
Fair Value Gap (FVG)Liquidity VoidImbalanceThree-Candle PatternContinuation TradeRetracementBreak of StructureConfirmationWicksValid FVGInvalid FVG
Test your understanding
- What is the primary purpose of a Fair Value Gap in trading?
- How does the three-candle pattern help in identifying a Fair Value Gap?
- Why is it important to wait for confirmation before trading a Fair Value Gap?
- What characteristics define an invalid Fair Value Gap?
- How do Fair Value Gaps differ from market reversals?