hey Traders and welcome to another episode of smart risk trading without the skill to identify proper and highquality fair value gaps can be extremely risky and may result in significant losses fair value gaps often overlooked by many represent the footprint of institutional money in the market they play a pivotal role in executing well-informed trading opportunities and are a Cornerstone in the strategies of smart Money traders in today's episode we are diving into various Candlestick fair value Gap types the psychology behind them and the price actions associated with them that you might encounter in the market from basic to Advanced but that's not all we'll break down the key criteria and rules that elevate a fair value Gap into a winning trade so Traders if that's something you're interested in please give this video a thumbs up to show your support and subscribe to our Channel if you are new see you after [Music] intro [Music] welcome back Traders so let's get started before diving into the basic and advanced features of the fair value gaps let's have a quick breakdown of Market sentiment and see what is the main factor that fuels the market and what is the major psychology behind the market movement the Dynamics behind Market movements can be boiled down to two key factors that consistently influence price Direction the first element is the the liquidity zones Market continually seeks to sweep liquidity to generate momentum essentially liquidity serves as the lifeblood of the market playing a vital role in the Market's overall Dynamics and functioning we have extensively covered how to identify liquidity zones in previous videos which you can find Linked In the description if you haven't watched it yet you can easily access it through the description of this video the second factor is the fair value gaps the the market consistently shows a tendency to fill and rebalance the gaps present within it if you look at this example you can notice that the price sharply dropped with inefficiency leaving a fair value Gap behind subsequently the price moved back up and filled the fair value Gap simultaneously it also moved upward to clear out external liquidity once external liquidity was swept the price reversed back down to fill the most recent fair value Gap this cyclical pattern reflects how the market operates where price tends to both clear accumulated liquidity and fill fair value gaps now let's continue and explore how we can identify fair value gaps from the Candlestick perspective in the Market Fair Value gaps are typically formed within a three candle sequence and are easily noticeable on the chart as a large candle the distinguishing feature is that the upper and lower Wicks of the neighboring candles do not complete completely overlap the body of the middle candle this creates what we call the fair value Gap Zone which essentially fills the space between the Wix and is drawn on the body of the middle candle however there is an exception in that we must consider a four candle sequence to identify a valid fair value Gap when the first candle in a three candle sequence is an inside bar candle and forms within the preceding mother candle it becomes necessary to analyze a four candle sequence to accurately identif ify the valid fair value Gap Zone in situations like this if we do not consider the mother candle when we are drawing the fair value gap on the chart our identified Zone will not be optimized or valid for example in this scenario if we solely focus on this three candle sequence to identify the fair value Gap without taking into account the presence of this red candle the identified fair value Gap would be incorrect these concepts are applicable to bearish markets as well it's important to note that these principles can be applied apped across various time frames and any price action based chart now let's see what is the theory behind the fair value gaps consider a three candle sequence as Illustrated let's say that this bullish Candlestick sequence which created a significant imbalance in the market occurred in a higher time frame to analyze this three candle sequence from the market structure perspective let's zoom into a lower time frame here we see that the price created a bullish structure similar to the one Illustrated as mentioned earlier the market consistently shows a tendency to fill and rebalance the gaps present within it now let's take a closer look to understand the rationale behind this phenomenon as you can see the price created a successive bullish structure to the upside with great momentum driven by high buying pressure and a lack of sellers in the market when Traders encounter such sharp movements and miss out on a great buying opportunity they often play Place their by limit orders below key zones such as order blocks and demand areas hoping that the price will make a deep pullback and activate their orders before resuming its upward movement this scenario accumulates a lot of pending buy orders in this area creating a significant liquidity pool awaiting to be swept by the market inside the fair value Gap so Traders fair value gaps are filled with many buy or sell orders creating a substantial liquidity pool inside the Gap this is the primary reason reason why the price is likely to return to fill the gaps and then continue its momentum with even greater strength the presence of these pending orders within the fair value Gap acts as a magnet for Price attracting it back to fill the void before resuming its Trend this might provide a great trading opportunity for us but before we continue if you're curious about how we stay updated on financial news and fundamental analysis well we rely on fastb one of the best trading websites with VAR ious useful trading tools this site provides one of the most accurate and detailed economic calendar a tool we use every day before starting our technical analysis 247 economic live streaming also allows us to stay informed about the latest trading world's news and fundamental analysis so if you want to benefit from multiple trading tools that can significantly improve your trading make sure to check the link in the description imagine a scenario where the price experiences a downward movement in this case a fair value Gap also known as a liquidity Gap emerges due to the absence of buying pressure spanning across that specific downward price movement please note that the identification of the Gap is solely based on considering the impulse up or impulse down candle along with the adjacent candles other candles outside this range do not play a role in determining the Gap these pockets of liquidity voids hold significant importance as they can serve as potent entry points due to the the Market's attraction to liquidity when the price is inclined to move downward it aims to clear the potential liquidity zones above it consequently these zones become favorable regions where the price might witness an upward movement only to eventually fill the gaps and then continue its bearish momentum with greater strength as we understand the psychology behind the fair value gaps now let's see how we can take advantage of them in identifying Market's upcoming movement and Direction the key factor that we can consider to determine price direction is the price action that unfolds when price enters the fair value Gap if the price respects the fair value Gap and shows a rejection towards the upside it suggests that the price will likely aim to move upward to reach the most recent buy side liquidity which is accumulated above the recent High conversely if the price does not show a reaction upon reaching the fair value gaps it indicates that the price is more likely to move downward to Target the sell-side liquidity accumulated below the recent low to solidify our understanding of fair value gaps let's see how we should identify them on the chart consider a series of bullish candles as Illustrated let's begin our analysis from the bottom of the candle series here we have a three candle sequence represented by these three green candles if we draw lines from the upper Wick of the first candle and the lower Wick of the third candle we see a gap between them moving forward we encounter another fair value Gap within this subsequent three candle sequence however price subsequently experienced a downward push ultimately filling all the gaps in the continue we witness a strong upward momentum in price now where is our next fair value Gap by drawing lines from the upper Wick of this bearish candle and the lower Wick of the following green candle we identify another fair value Gap created between the candles next a little bit higher we have another three candle sequence however if we draw lines once again we see that there is no gap between the candles and there is no fair value Gap to identify once again if we consider these three candles and draw lines from the upper Wick of the first candle and the lower Wick of the last candle we see that there was a gap between the candles which is mitigated and rebalanced with these two candles next we have another three candle sequence at the Top If we draw lines we can easily identify another unmitigated fair value Gap here so in this bullish candle series we've identified two unmitigated fair value gaps one located at the top and one located at the extreme the price tends to push back down once again to fill the liquidity voids in these fair value gaps and then continue its bullish momentum price can reverse from the upper fair value gap or it can push lower to mitigate the fair value value Gap at the extreme both scenarios could happen in the market the same Concepts can be applied to the bearish scenario now let's take a quick breakdown of the real chart and see how we can utilize the fair value Gap Concept in Market structure mapping before using a strategy or setup in a real account it's recommended to back test it at least 100 times to help you with this critical step we use the trader Edge platform for back testing our exclusive trading strategies and setups if you're interested in using Trader Edge as your back testing tool be sure to check out the link in the description below so here we have euro dollar 1our chart on the screen as you can see Price's dominant direction is bearish for identifying fair value gaps with high probability firstly we need to wait for the price to form a valid break of structure here we see that the price pushed to the downside and has broken the previous major low closing below it thus we have we have a valid break of structure next let's identify potential fair value gaps resulting from the recent bearish momentum in the market in a bearish market it's crucial to analyze the chart from top to bottom to identify fair value gaps whereas in a bullish Market the analysis proceeds from bottom to top starting from this high point we'll begin our analysis here we encounter a three candle sequence at the market extreme by drawing lines from the lower Wick of the first candle CLE and the upper Wick of the third candle we identify a distinct unmitigated fair value Gap situated at this extreme Point upon closer examination of the chart it becomes evident that there are no additional fair value gaps within this internal bearish impulse move now we can see an inside bar candle pattern that formed just before the price created inefficiency in the market with this large momentum candle as previously mentioned in cases like this identifying a fair value Gap requires analyzing a four candle sequence instead of a three candle sequence to highlight a valid and optimized Zone therefore we should draw lines from the lowest point of the mother candle and the upper Wick of the fourth candle to highlight the valid fair value Gap however it's crucial to note that this fair value Gap is mitigated by the price and we cannot consider it as a trading opportunity so inside this bearish impulsive movement we've identified two fair value gaps one of them was mitigated by the price action while the other remains unmitigated located at the Extreme as previously discussed prices are more likely to return to fill and rebalance the gaps before resuming their primary Trend therefore what we should do here is to wait for the price to retrace back up to fill the gaps it has left behind before continuing its bearish momentum let's see what happens next as you can see the price pushed back up again and after filling the fair value gaps reversed its direction and resumed its bearish momentum now let's move into essential criteria and rules that we need to consider to identify and use fair value gaps to execute trades in the market and understand how we can use them to our advantage rule number one it emphasizes that for considering a fair value gap for executing trades and as an entry point the price must lead to a break of structure or a change of character in the market without a valid break of structure and change of character we must not execute any trades based on Fair Value gaps because these elements are essential signals that indicate whether the market will continue in its initial direction or experience a reversal rule number two in a bearish market our focus should be exclusively on Fair Value gaps situated in the premium Zone when seeking to initiate short positions conversely in a bullish Market our attention should be directed solely toward fair value gaps positioned in the discount area to execute long positions rule number three fair value gaps situated at Market extremes hold a higher priority when it comes to trade execution compared to those found elsewhere rule number four it must be unmitigated fair value gaps areas are considered one-time use meaning we focus on the trading opportunity when price first enters a fair value Gap once a fvg has been mitigated we do not consider it as an area of interest for fure trading 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