Lecture Notes: Fair Value Gaps Part 2

Introduction

• Apologies for the late video
• Commitment to daily uploads despite lack of sleep
• Topic: Fair Value Gaps Part 2

Recap: Fair Value Gaps

• Definition: Areas in the market with lack of liquidity, meaning no resting orders in the opposite direction of price movement.
• Purpose: Opportunity for market movement due to liquidity voids
• Key Concept: Price will draw into the fair value gap (liquidity void) and react.

Characteristics of Fair Value Gaps

• Not for Reversals: Used for retracements and continuations, not turning points.
• Bullish Example: In a market trending higher, look for bullish fair value gaps as retracement opportunities.

Identifying Fair Value Gaps

• Three Candle Pattern:
  • First Candle: Starting point
  • Second Candle: Creates the imbalance (large movement without resistance)
  • Third Candle: Completion of the pattern
• Bullish Gaps: Measure from the top wick of the first candle to the bottom wick of the third candle.
• Bearish Gaps: Measure from the bottom wick of the first candle to the top wick of the third candle.

Practical Application

• Look for areas without wicks crossing into the gap zone, indicating no resistance.
• Example Process:
  • Identify break of structure (bullish/bearish bias confirmation)
  • Wait for price to fill the gap and react (e.g., price chop and rally)

Execution Tips

• Wait for Confirmation: Do not execute trades purely on fair value gap filling; wait for reaction or lower timeframe confirmation.
• Recognize Valid Gaps: Not all perceived gaps are tradable; ensure they meet the criteria.
• Example setup: After identifying a gap, wait for price action confirmation (e.g., bearish candle closing in a bullish gap for bearish continuation)

Homework Assignment

• Task: Identify ten fair value gaps on your chosen trading pair.
  • Create hypothetical trade plans using identified gaps
  • Understand why some are not valid gaps (e.g., wicks fill the gap)

Conclusion

• Recap the importance of identifying accurate fair value gaps.
• Reminder to differentiate between real and false gaps effectively.
• Upcoming: Psychology Zoom discussion.

Final Notes

• Importance of patience and correct identification in trading fair value gaps.
• Expectation of further educational content and improved conditions for the next session.