Fair Valuation in Forex Trading

Oct 13, 2024

ICT Mentorship: Understanding Fair Valuation

Key Topics Covered

  • Fair Valuation Perspectives

    • Equilibrium: Equal distance of a high or low.
    • Market Makers: Valuation for market makers in price action.

  • Practical Application

    • Example chart from September 24, 2016, focused on the Australian dollar.

Concepts of Fair Valuation

Equilibrium and Market Ranges

  • Equilibrium

    • Defined as the midpoint of a trading range, crucial for identifying fair value.
    • Buyers should aim to buy in a discount market (lower third of the trading range).
    • Sellers should aim to sell in a premium market (upper third of the trading range).

  • Fair Value Gap

    • Occurs when there is a gap between price movements, indicating a lack of trading activity.
    • This gap is significant for identifying areas where price will likely retrace to.

Liquidity Voids and Fair Value Gaps

  • Liquidity Void

    • A sudden drop in price with little trading activity, signified by large ranges and minimal wicks.
    • Indicates areas where price may return to "fill in" the gap.

  • Fair Value for Market Makers

    • Price moves quickly between gaps, establishing areas that market makers see as fair value.
    • Market structure break: Recent high/low breaks offer clues on direction.

Analyzing Price Action

Current Trading Range Analysis

  • Define the high and low of the current trading range.

  • Determine if you are in a premium or discount market relative to the 50% equilibrium point.

  • Look for recent swing highs/lows to ascertain market direction.

  • Directional Bias

    • Analyze whether the market is likely to move higher or lower based on structure.
    • Recognize areas where the market is oversold or overbought.

Market Makers' Strategy

  • Building Long Positions

    • Accumulate in areas of discount.
    • Liquidate in areas of premium.

  • Accumulation and Distribution

    • Fair value is where market makers accumulate or distribute positions.
    • Ensure you understand valuation from the market maker's perspective rather than a retail perspective.

Practical Application

  • Predict price movement by identifying fair valuation areas.
  • Understanding the efficient market hypothesis and its application to price action.

Conclusion

  • Fair value should be viewed from the perspective of market makers.
  • Consider market makers' actions—accumulation, manipulation, distribution.
  • Avoid retail mindset; understand institutional valuation for trading success.

These notes provide an overview of how to approach fair valuation in forex trading, focusing on the perspectives of market makers and equilibrium within trading ranges. Understanding these principles is crucial for anticipating market movements and aligning with institutional trading strategies.