Understanding Fair Value Gaps in Trading: A Comprehensive Guide

we'll be dealing specifically with the reinforcing of fair value gaps and it's a concept of trading inside the

range okay what is a fair value gap it is a range in price delivery where

one side of the market liquidity is offered and typically confirmed with a liquidity void on the lower time frame

charts in the same range of price price can actually gap to create a literal vacuum of trading thus posting

an actual price gap okay let's take a look at a euro dollar daily chart

okay and i'm going to ask you where do you see an example of the fair value gap okay i'm going to draw your attention to

it here it's a blue shaded area here on the daily chart let me explain to you

why i'm shading in that specific area of price it's about a 20 pip range

on the daily but inside of that blue shaded area

that is what is common referred to in my work as a fair value gap so take a look at what makes

that gap so significant as you can see here the candle to the

left of the down candle we're looking at that comprises the fair value gap

that's this candle here okay and to the left of that we have the higher

bearish candle and i'm drawing attention to the fact that it has a

down close but it's come off the low okay so we're looking at the low up to the close that little wick in there

if you take that same range okay and you look at our down candle that created that fair value

gap on the daily chart that range between 105 15

to approximately 105 big figure inside our down candle and in this candle here that's highlighted from the

low to the close

that price range has been traded up into once already delivering the buy side

liquidity in other words on this candle's low up to the close price had come off that low

so if it came off that low to have a higher close on that candle that means the buy side liquidity had been offered

on that range between 105 15 to 105 big figure so that means when we look at the down

candle that makes the fair value gap we're not concerned with the 105 15 to 105

big figure price range so we're going to be drawing our attention to that low here

and we'll draw that out in time but let's now look at the other candle

that frames our fair value gap the next area at which we see buy side liquidity

offered is from this green candle or up close candle to the right

of our down candle that makes the fair value gap the open to the high on this candle has

offered by side liquidity as well so we have seen price offered on the up

movement or buy side liquidity on two candles one to the left of our

fair value gap creating down candle on the daily chart and one candle to the right of it where we saw price move

higher in portion of that down candle so we have a range left that's open

and it specifically is this area right in here so we're delineating

the low of the previous candle and the high of the count to the right of the down camera that creates that little

pocket of space so between 105 big figure

down to 104.75 about 25 pips

that is our fair value gap and it's been left open there's been no trading outside of the

movement of that range except for that down candle and no up movement at all on this time

frame now when we're looking at fair value gaps

okay it's important to remind you that if we're studying a specific time frame the gap occurs on the time frame you're

looking at you can break this down further into smaller time frames but in the smaller

time frames you'll probably end up seeing a liquidity void where the gap would be indicated here on

this time frame on a lower time frame it would many times appear as a liquidity void where it's multiple candles that

create that open space of range okay so now we have our daily chart here we have our specific levels in mind that

we're watching and the two little line segments delaying one candle is low and one candle is high in between those two

reference points we have that big down candle and the exposed area in between that is the fair value gap that only the

cell side liquidity has been offered so imagine that paint brush analogy i've used many times in the past

on the down candle that creates the lowest low here there's a range with the candle before

it and the candle after it where it has left a pocket of porous price action or only delivered on the

downside we're going to expect price to eventually want to trade back up into

that little gapped area so this area in here that's where we're looking to see it fill in

that's the nature of a fair value gap so when we look at price and we're zoomed in a little bit now here with a

four hour chart okay and you can see that the two specific price levels again are

delineated as well and we have a low delineated

for potential liquidity run on sell stops below the low price does in fact go down below that

previous low and well now we can expect to see what form

a turtle suit or false break below an old low why would we reasonably expect it to go

back up to fill in that gap well because we've already taken the sell side liquidity out

by running an old low we have equal highs here delineated also on our chart on a four hour basis and

right above those equal highs we have our fair value gap eventually price does in fact trade back

up closes the fair value gap in that trade or that idea is now complete while it doesn't look like a great deal

of money or pips offered it's a very highly profitable and probable

condition in the marketplace where we can see these fair value gaps and double tops where buy stocks will be

resting above it and if you see a turtle soup run below an old low you're in a range

this time of year going into the end of the 2006 trading year going into the

holidays uh trading is going to be range bound and when you're in a range bound consolidation type format or profile for

the marketplace this is the style trading you want to be doing looking for stops and looking for fair value gaps so

it was well over 100 pips of a move and it only took about two days to to complete that little price swing

and in fact this range of price action in the form of a fair value gap was actually detailed to you

in the beginning of this week where we delineate it on the daily chart the fair value gap as outlined here

and on the daily chart you can see it's been filled in here so while there's a lot of information

about fair value gaps and breakaway gaps and measuring gaps that's going to be coming your way in the form of the

december study notes just understand that everything has been shown here is reversed

for buy side liquidity runs where the market will come back and closing a fair value gap that's below the marketplace

to seek to fill in the sell side liquidity i want to take a quick look at something

else because i mentioned that the gaps fair value gaps liquidity voids

order blocks and liquidity pools they kind of overlap a lot of in a lot of different ways that you're probably not

aware of yet and that's what the benefit of having the pdf files study notes and also the supplementary

teachings that's going to happen next week monday through friday while we're away from live trading and live sessions

with the ict mentorship you will be getting a daily video supplementing these specific

techniques and concepts for the month of december so to help you really dial in on the concepts going

forward so that we are prepared and primed for the content for january 2017. but i want to take you back over to the

charts and give you something by way of understanding the overlap of liquidity voids and fair value gaps

okay folks we're looking at at 104.75 level i have the charts trained in on a five

minute euro dollar and we're seeing the very moment that that 104.75 level was

pierced here on the 19th this is the second time it trades through

that 104 75 level and i want to just draw a special attention to

this area up here okay and now i'm going to show you what it

looks like when we have a a run above an old high which is what this is 104.75

it's also run on liquidity in the form of a liquidity pool so it's running buy stops

but also it's hitting that fair value gap also so straight into the fair value gap

and i said in lower time frames many times this will create a liquidity void you see a movement lower here on this

candle and then we have another candle here look what happened

the next candles open is down here so you have this gap in here so price trades up into that and closes

that in right there see that price then

moves lower significant break lower and then lower

and ultimately trading through to where the cell stops were mentioned earlier

okay let's take a look at it on a 15-minute basis here's the

first time it trades up into that 104 75 level closing that fair value gap

and then here's the second time it trades up into it running out the previous high

the previous high this time was at 104.77 this candle's high comes in at 104.78

so it trades to it just by one pip now watch the difference here we have a down candle here a lot of

movement lower but it comes off that low watch what happens now we gap

we get from this candles close 104 72 to an opening on this candle

of 104 70. now it's only two pips difference but that creates a what a gap

so we can be a seller at a more refined price level mentioned and earlier time we said that we could

be a seller at 104.70 on a limit when price trades back up to that level

if it doesn't give us an opportunity to go on a limit we can trade it right as it hits it

live it can be in front of the charts right there there's your cell now here's the thing look at the body's clothes

on this candle right here the close is 104.72 that's exactly the high on this candles

close 104.72 the wick trades through the body but the bodies of the candle

completely close in here so this gap between these two candles these two black down candles

this gap in between the bodies have perfectly been filled in with this up candle so this is exactly what i'm

referring to as efficiency in terms of the price delivery if this movement lower has been offered

on the downside okay now think look closely this candle is high

comes in at 104.78 the close is at 104.75 the next candle

it opens at 104.76 i'm sorry 104.74 and then it creates a high

at 104.76 so it moves two pips up so from the

opening to the high is buy side liquidity offered

then it trades down for a down close then we gap down here there's a gap of buy side liquidity from

these two candles from this candle's opening that's exactly where this price goes on

the upside from the open to the high the open is 104.63 the high is 104.74 which is the opening here

104 74. that's the last point at which the buy side liquidity is offered on the up movement then it's all down from the

opening it fills in that perfect delivery of price right there

and then at that moment when you see this live you can be a seller at that moment

and price does exactly what we mentioned earlier when we're looking at the higher time frame

this delivery here price from this candle is low up to the close buy side was offered here and buy side

was offered from the opening to the high here so there's a gap closure here on all the downside movement here so this

has all been closed in so efficiently we could look for this range being delivered lower

we have to consider back here where price was delivered on the buy side here so this low

comes in at 104.55 so if we drop that down to there 104 55 that's where the last point at which the

low had traded up to the close so buy side liquidity has been delivered

here it's all sell side liquidity at this moment here it's all sell side now nothing over here

until we get over here so we created a gap down here price trades up hits it here hits it

here we could be a seller at 104.55 or 104.50 looking for a move down below 104

15 to 104 10. there's your run right there

perfect delivery of price hits it here hits it here look at the high on that candle

104 55. 104.55 the low on this candle 104 55. the buy

side all green candles up then it comes down so this is all efficiently traded it's a full block of delivery deficiency

up and down both ranges on both sides of the delivery of price dubai and the south side have been offered in here

from this low to this high once we break this low here we're all on sell side now

it comes right back to it here perfect delivery efficiently priced at 104

55 does it twice time to sell it off and wait for it to

run the cell stops below this low and this low down here let's just put a line on it so you can see

right there and watch the delivery

boom perfect so perfectly delivered down into the cell stops below the low lows

so hopefully this has been a little bit more insights into how the liquidity pools

and liquidity voids and fair value gaps draw together in an overlapping

scenario but again there'll be a lot more scenarios to outline in your pdf file for the summer's content

so i wish you good luck and good trading