Okay folks, welcome back. We're looking at teaching 3.6, reinforcing order block theory. We're dealing specifically with the vacuum block.
Okay, a bullish vacuum block is a gap that's created in price action as a result of a volatility event. The gap forms by a vacuum of liquidity directly related to an event. Non-farm payroll can create a vacuum block or in futures, a session open can.
Okay, on the left-hand side here, we have a crude depiction of price action. Short-term lows formed, and this could be if we're trading futures contracts where they have session opens and closes where there's no trading. Or if we see a stock, it could be a intraday indice, it could be like S&P 500, or it could be just any old Forex pair.
And there may be a large volatility injection coming in the form of an economic calendar release. It could be non-farm payroll. It could be a FOMC-related event, anything along the lines of interest rates. Or it could be a... geopolitical event that was not Foreseen maybe not even on the economic calendar say a terrorist attack Something of that long something of that nature at any rate.
We're going to assume that we see the market gap up Okay, when we see that gap the the first Assumption is on the part of most traders is it's things going to keep going higher right away and sometimes it will But we're going to be looking at the vacuum block in the scope that we can use it to get in sync with what may be underlying in the marketplace. The short term low that's formed here in our diagram, if we have traded lower prior to that swing low, in this case, this outline that I'm giving you here would be a little bit more probable. If the market had been rallying for a number of days or weeks or it's been in a prolonged uptrend and then it does this, this could potentially be an exhaustion gap. An exhaustion gap is typically a graphic depiction of capitulation. And capitulation is basically like the last bit of momentum in underlying trend or direction.
But assuming that we have been in a. downward correction in an upward market or if we've been in a down market and we expect the market to give some kind of a bullish news or we're expecting the market to reach for liquidity above where we're currently trading at and the news event releases and we get this gap up. What we're essentially saying is if we gap up away from a market that's in a discount we've had some retracement, but we are expecting higher prices nonetheless. We see this gap like this.
The first thing I want you to start thinking about is when we see that, that space in between the two candles is important. Now, while on our charts there's going to be a vacuum, if you will, of trading, there's no trades being made between the previous candle's close and the next candle's opening. So that gap, it could be large and sometimes, for instance.
Nonfarm payroll, it can gap sometimes 30, 50, 60 pips from where it was trading right before the numbers release. And all of a sudden, they do a quick repricing at the central bank level. Because that happens, there's absolutely no way for any trader to execute. There's no trade between those two price points.
So what it does, it creates a vacuum of liquidity. Most times, I'm not going to give you a specific. percentage because there's no real accurate way of depicting that because it's just we're going to classify as a high probability that the market will want to come back and try to close that in.
There are some points that I want you to take special notice of as we go through this but for the most part is we're going to anticipate that move to fill in. But first we have to identify that gap in a specific manner because after looking at the gap we come to the realization again that there's no trades being made in this range. So if there's no trades in that range, what's the market actually done? It's Gapped up through it and started trading at a higher price on a new candle when it opened up and it trade a little bit more and now we have to discern whether or not the market is going to continue and run away from that price level and Leave the gap opening or will it trade back down and close in that range?
And if it doesn't close in the range How much can we reasonably expect for that range to close in and still look for a potential buy setup inside that range? We have a vacuum block and that means we've blocked out a reference point in time and we have to look at it like this because even though there's no candlestick or bar on our chart, price did in fact have a parameter before and end. We can look at it as this handle or range.
Okay. And again, we're interpreting it. We're visualizing it, if you will. There's an absence of liquidity there. There's an absence of price being traded there.
But we're defining it as the high and the low of the gap. Now, if we looked at it in the terms of a candle or a bar, it would be just the same as anything else. We would expect to see a mean threshold, an opening and a close. So if we see that.
Okay, we're just going to treat it just like any other candle. So let's take a look at it now with the gap in mind, and let's assume for a moment we start seeing price trading lower. Our expectations are one of two scenarios.
If we're bullish, we're looking for, is there any bullish order block or down candle that would cause the gap to not want to fill entirely? As price trades down, we see that actually occurring here. We have the down candle right before the up move, and it's two consecutive down candles.
So the bullish order block would begin at the higher of the two down candles prior to the gap up. And as price trades into that candle, we would reasonably expect a potential bounce there and leave that little gap opening still intact. But this could potentially be a buy. Now if you're looking for this to occur, you'd have to see immediate feedback. If you're going to be buying there, can you take the risk that's associated with entering here and using a stop below that lowest down candle?
So your range in terms of managing your risk and defining the risk would be between those two reference points. If price was trading lower and we get down to that order block area, And we don't want to buy there. Say we have a little bit stronger conviction that we'll probably trade back down into the last up candle before the gap. The reasons I would expect to see that is if it was time of day sensitive.
In other words, if we had a lot of day left in the day where we can trade. In other words, if it's just now beginning of New York, New York would probably come down and close that gap in. Gapped up late in the afternoon chances are it probably would leave the gap open But if price trades down into this point here in time of day permits more trading in other words if it's still Early New York session or it may be even a London session that it creates that gap Highly unlikely that it does it in London usually it's Trading event that takes place but a gap like this usually occurs in the New York session or late New York with FOMC but Generally, at 8.30, news embargo lifts. There is usually markets that cause a gap like this to occur.
So we're going to assume that it's still early in New York. 8.30 would be relatively decent in terms of allowing more time for the day to unfold. We could forget the bullish order block level here and anticipate this small little area still to form.
But if we are later in, for instance, say it's 10 o'clock or 11 o'clock hour, and we get this gap, we may end up seeing this portion of the gap to remain open and that would present us a fair value gap for a later time. We would look for price to a later time, come back and close that in, but leave it open during this specific trading day. Again, that would begin our thought process like that if the gap occurs late New York opening or after 10 o'clock in the morning to 11 o'clock in the morning, the news events that usually release there.
So we have two reference points here, the opening of the gapped up candle and the close of the up candle right before the gap. forms and again as price trades lower lower boom it hits that and we would see a complete closure of the gap that would be a full return on a vacuum block in other words everything has completely been closed in this whole range here is 100 filled this is in effect perfect delivery of price once it's done this this is completely balanced out now and if we are expecting higher prices If there's liquidity that hasn't been sought out after prior to that highest high that formed on the gap opening, that bullish liquidity above the marketplace would now allow price to drive higher. So this could be a buy here. And now notice buying here and using a stop loss below the lowest low, your risk is more defined for more leverage, but still having the same potential parameters for exposure percentage of your equity.
If price was to trade down and hit that level and we start to see a rally up, we don't want to see price ever come back down below the level that would have caused it to close the gap. When we see this, we're looking for the up candle that formed at the gap. We want to see that low be cleanly broke through.
We don't want to see it hesitate here because otherwise that would be a bearish order block, right? So what we're looking for is we're anticipating the bullishness of this move to drive right on through that last up candle when it gapped up. Because now price has already been delivered efficiently. That vacuum of liquidity has been completely balanced out. We traded down with the two down candles to close the gap.
Now we've had a bullish move up. So what has happened? Price has been delivered on the downside to close the gap. And now it's trading up.
There's no reason for price to come back down. It's closed in and filled in that vacuum of liquidity. There's no reason for it to come back down and trade below the last point of reference before the gap, which would be the close of the first up candle.
So when that closes in that range, the vacuum block is completely filled in, and now price is permitted to trade bullishly higher. And once it takes out that high, we would expect to see price continue on the upside. So in summary, a vacuum block.
is nothing more than a breakaway gap. What I teach with the breakaway gap is because it creates a vacuum of liquidity, you have to understand not all gaps fill completely. And why do we anticipate the gap sometimes not filling?
If there's a bullish order block, in this case, if we're bullish and we gapped up, the price may only come down to a bullish order block that would be inside that gap. Price just comes to that level and then stops trading lower and then rallies higher leaving a small gap Which would be classified as a fair value gap and we could use that at a future time When price is now trading lower and we would look for price to come down and close that gap in But if it stays open We would label that while we're bullish as a breakaway gap and it would show Willingness to and strength to get in there and expect higher prices. So for expecting bullish prices and price closes in that gap It's filled in that vacuum of liquidity.
It gaps up. We close in the gap with price delivery on the downside. Price trades bullishly up through it.
So now we've had both passes in price and delivery. We've had it sell down and rally up. So there's been no reason after that point to see price go down below that first up candles close. If it does, the trade is probably going to be suspect. And you would want to look to take some profits if you've seen a move like this, take something off.
But if it starts to correct and go lower, you want to take the complete trade off because there's no reason for it to come back down into that area once it's already closed the gap. So then this is a bullish vacuum block. The reverse would be seen if we had gapped lower and we would wait for that gap to fill in on some up candles and then we would go short.
in the same menu that we would do here looking for long system in reverse.