Fair Value Gaps and Market Imbalances

Jul 16, 2024

Lecture Notes: Fair Value Gaps and Market Imbalances

Introduction

  • Location: Miami
  • Context: Boot camp lecture for traders
  • Topic: Fair value gaps, liquidity voids, and imbalances in the market
  • Session Focus: Understanding fair value gaps and their role in trading

Key Concepts

Fair Value Gaps (FVG)

  • Definition: Also known as liquidity voids or imbalances
  • Nature: Price ranges with no contradicting orders
  • Usefulness: Helps identify where there are no opposing orders (buys/sells) in the market

Liquidity Voids

  • Concept Similarity: Fair value gaps and liquidity voids are essentially the same
  • Market Behavior: Large moves occur because of absence of opposing orders
  • Examples:
    • Upside move: No sell orders, hence the surge
    • Downside move: No buy orders, hence the drop

Imbalances

  • Causes:
    • Large up or down moves without minor retracements
    • Represents voids where there are no resting opposing orders

Spotting and Using Fair Value Gaps

Why Use Them?

  • Trade Confidence: More reliable than traditional support/resistance levels
  • Market Confluence: Trades based on market confluence and order execution offer higher confidence

How They Work

  • Uptrends: Identify where higher lows draw to previous liquidity voids
  • Downtrends: Identify where lower highs draw to liquidity voids

Practical Applications

  • Retracements: FVGs are best used for identifying retracement levels
  • Secondary Entries: Spotting FVGs can aid in confirming entry points during a price retracement

Example Strategy

  • Break of Structure: Look for a break of structure in a lower timeframe within an FVG
  • Execution: Enter trades based on confirmed breaks within these voids

Summarized Process

  1. Identify a fair value gap (liquidity void) within the market
  2. Watch for retracement into the void
  3. Utilize smaller timeframe breaker structures for entry confirmation

Conclusion

  • Benefits of Understanding FVGs: Simplifies trading by focusing on market mechanics and real orders
  • Versatility: Applicable on any timeframe and financial market
  • Next Steps: Further exploring discipline and practical exercises to improve trading skills

Homework and Motivation

  • Actionable Advice:
    • Engage in a productive activity after viewing the video
    • Balance productivity with leisure

Next Session

  • Topic: Discipline in trading, tips, and exercises to improve focus and consistency
  • Encouragement: Push yourself out of your comfort zone for growth

Remember: Trading isn't just about identifying patterns; it's about understanding market behaviors and using logical strategies to achieve success.

Full transcript