[00:00] Fair value gaps are everywhere on the chart, but that doesn't mean you should trade every single one of them. The real challenge is knowing which fair value gaps are worth trading and which ones you should completely ignore.
[00:12] In this video, I'll show you five powerful fair value gap hacks that can help you identify higher probability setups and avoid some of the most common mistakes traders make. Then, I'll take things one step further and break down four advanced fair value gap trading strategies,
[00:27] with real chart examples showing you exactly how to use them. So, let's get started with the basics. What exactly is a fair value gap? A fair value gap, or FBG, is an imbalance that forms when price moves aggressively in one direction,
[00:41] leaving an area where very little trading has taken place. Because of this imbalance, price will often return to the fair value gap before continuing in its original direction. As traders, we can use this retracement as a potential entry opportunity,
[00:55] looking for price to react or reject the gap and continue with the overall move. To identify a fair value gap, start by looking for a three candle sequence with a strong price move in the middle.
[01:07] For a bullish fair value gap, the high of the first candle and the low of the third candle should not overlap. The space between these two levels is the fair value gap. You can then draw a rectangle over this area to clearly mark the gap on your chart.
[01:21] For a bearish fair value gap, the concept is simply reversed. We look for a gap between the low of the first candle and the high of the third candle. And remember, if the first and third candles overlap, there is no fair value gap, regardless of how large the middle candle is.
[01:37] Now you know how to identify and draw a fair value gap, but there is one important thing to understand. Not all fair value gaps are created equal. Some SBDs have a much higher probability of producing a strong reaction than others.
[01:49] So let's look at the first rule I use to filter them. Number one, look for an unmitigated fair value gap. Unmitigated simply means that price hasn't returned to test the gap yet. When a new fair value gap forms, the first retest is generally the one we're most interested in.
[02:04] If price has already returned to the gap and reacted from it, I prefer to avoid using that same FEG for a new setup. There's also another important rule. When price returns to the gap, we want to see it respect the area.
[02:17] If price trades aggressively through the FEG and closes beyond it, that can signal that the imbalance has failed. So, to keep it simple, focus on fresh, unmitigated fair value gaps and pay close attention to how price reacts on the first retest.
[02:32] Number two, focus on strong imbalances. Whenever you see multiple fair value gaps within the same price move, you need a way to determine which one deserves your attention. One useful filter is the size of the imbalance.
[02:44] A larger, cleaner, fair value gap can indicate a more aggressive displacement in price and a stronger imbalance between buyers and sellers. So, instead of trading every small FBG you see, focus on the ones that clearly stand
[02:58] out within the move. Number three, consider the location. But what if you have several fair value gaps that are roughly the same size? In that case, look at where the FBG is located within the price range.
[03:10] For a bullish setup I generally prefer a fair value gap located in the lower portion of the range where price is trading at a discount For a bearish setup the opposite applies I prefer FBGs in the upper portion of the range
[03:24] where price is trading at a premium. This gives us another way to filter multiple gaps instead of simply choosing one at random. Number four, pay attention to key levels. Another setup I prefer to avoid is a fair value gap
[03:37] that leads price directly into a major opposing level. For example, let's say you identify a bullish FVG, but there is a strong resistance level just above it. Even if the fair value gap looks clean, that resistance could reject price before the trade has enough room to develop.
[03:53] The same applies to a bearish FVG sitting just above major support. So before trading an FVG, always ask yourself, does price have enough room to move, or is there a major obstacle directly in the way?
[04:06] Number five, look for displacement and a break of structure. Finally, one of my favorite fair value gap setups occurs when the imbalance is created by a strong displacement that also breaks market structure.
[04:18] For example, price breaks above a previous swing high with strong bullish momentum and leaves a fair value gap behind. Instead of chasing the breakout, we wait for price to pull back into that SVG
[04:30] and look for a potential continuation entry. For a bearish setup, it's simply the opposite. Now let's move to our first fair value gap strategy. This strategy combines a fair value gap with a liquidity sweep to find a higher quality entry.
[04:44] Take a look at this chart example. As you can see, the market makes a strong move upward, leaving this fair value gap behind. Let's mark the gap on the chart. Now look at what happens next.
[04:57] Price retraces back into the fair value gap, briefly trades below it, and then closes back above the gap, creating a clear liquidity sweep. so instead of trading the fair value gap blindly, we wait for this additional confirmation.
[05:10] Here, we also have a doji candlestick showing rejection. We place our entry at the close of the doji, our stop loss below the sweep, and our target at the next key level. Now look at what happened next.
[05:23] As you can see, the market moved higher as expected and reached our target. Now let's look at another example. This is gold against the US dollar on the 15-minute chart. As you can see, the market makes a strong move downward, leaving behind a clear bearish fair value gap.
[05:40] Let's mark this area on the chart. Now look at what happens next. Price retraces back into the fair value gap, briefly breaks above it, and then closes back below, creating a liquidity sweep.
[05:52] We also have a bearish pin bar, which gives us additional confirmation that price is rejecting the area. So, we place our entry at the close of the pin bar, our stop loss above the sweep, and our target at the next key level.
[06:05] Now look at what happened next. As you can see, price moved sharply lower and reached our target. The second strategy consists of combining a fair value gap with key support and resistance levels.
[06:18] Take a look at this example. This is the British pound against the US dollar on the 15-minute chart. As you can see the market makes a strong move downward leaving behind a clear bearish fair value gap Now if we look to the left we can see a previous support level that has turned into resistance And this resistance level is located inside the fair value gap
[06:39] So now, we don't just have a fair value gap. We also have a key resistance level providing additional confluence. Now look at what happens next. Price retraces back into the fair value gap, briefly moves above the resistance level, and then gets strongly rejected.
[06:55] We can also see a clear liquidity sweep at the level. This gives us a powerful setup combining the fair value gap, resistance, and liquidity sweep. We place our entry at the close of the rejection candle, our stop loss above the sweep, and our target at the next key level.
[07:11] Now look at what happened next. As you can see, the market moved down as expected and reached our target. Now, let's look at another chart example.
[07:23] This is the British pound against the US dollar on the 5 minute time frame. As you can see, the market makes an impulsive move upward, followed by a retracement, and then another strong move higher. Here we have two fair value gaps.
[07:36] This is the first one, and this is the second one. But if we look to the left, we can see a previous resistance level that was broken, and has now turned into support. More importantly, this support level is located inside the second fair value gap.
[07:50] So, instead of treating both gaps equally, we focus on the fair value gap that aligns with the key support level and ignore the other one. Now look at what happens next. Price retraces back into the fair value gap and gets rejected from both the gap and the support level.
[08:06] This gives us a strong signal that buyers may be stepping back in and that the market could continue higher. We place our entry at the close of the rejection candle, our stop loss below the setup, and our target at the next key level.
[08:18] Now look at what happened next. As you can see, the market moved higher as expected and reached our target. The next strategy consists of combining a fair value gap with an order block.
[08:31] Take a look at this example. This is the New Zealand dollar against the US dollar on the 15-minute chart. As you can see, the market makes a move downward, consolidates for a while, and then makes another strong move lower.
[08:43] Here, we have a bearish order block, followed by a break of structure. We can also identify a fair value gap located just below the order block. Now look at what happens next.
[08:55] Price retraces back into the fair value gap, trades through it, reaches the order block, and then gets strongly rejected. So here, we have two areas of confluence, the fair value gap and the order block.
[09:07] Instead of relying on the SEG alone, the order block provides additional confirmation for our bearish setup. We place our entry at the close of the rejection candle, our stop loss above the order block, and our target at the next key level.
[09:20] Now look at what happened next. As you can see, the market moved down as expected and reached our target. Now let's look at another chart example. This is the US dollar against the Japanese yen on the 15 minute chart.
[09:35] As you can see, the market makes a strong move upward, followed by a retracement, and then another move higher. Here we have an order block and here we have another order block that also aligns with a fair value gap So we focus on this area because we have both concepts working together Now let see what happens next
[09:55] Price retraces back, reaches both the fair value gap and the order block and then gets rejected. This rejection gives us our entry signal. We place our entry at the close of the rejection candle, our stop loss below the order block and our target at the next key level. Now look at what happened
[10:12] next. As you can see, the market moved higher as expected and reached our target. Now let's move on to strategy number four, the inverse fair value gap, also known as an IFCG. An inverse fair value
[10:24] gap is simply a fair value gap that has been broken and then starts acting in the opposite direction. Normally, when price breaks through a fair value gap, we consider it invalidated. However, instead of completely ignoring it, we can use that same area as a potential support
[10:40] or resistance zone when price comes back to retest it. In other words, a bullish FBG can turn into resistance after being broken, while a bearish FBG can turn into support. Now, let's look at a chart example to see exactly how this strategy works.
[10:56] Take a look at this chart example. This is the British pound against the Japanese yen on the 5-minute chart. As you can see, the market makes a move downward, leaving behind a clear bearish fair value gap. Let's mark this area on the chart.
[11:09] Now look at what happens next. Price moves higher and breaks through the fair value gap. At this point, the original bearish SVG has failed, and can now be treated as an inverse fair value gap.
[11:23] Price then retraces back into this area and gets rejected, forming a doji candlestick. This rejection gives us our potential entry signal. We place our entry at the close of the doji, our stop loss below the inverse fair value gap, and our target at the next key level.
[11:38] Now look at what happened next. As you can see, the market moved higher as expected and reached our target. Let's look at another chart example. As you can see, the market initially made a move upward, creating a clear fair value gap right here.
[11:55] Let's draw it. Now look at what happened next. The market retraced back into the fair value gap and eventually broke below it.
[12:07] Once the fair value gap is broken, it becomes an inverse fair value gap. Price then retraced back toward the inverse fair value gap. Once it reached the area, it was rejected, forming a bearish pin bar. That's our confirmation signal.
[12:20] You can place your entry at the close of the pin bar, with a stop loss above the high, and your profit target at the next key level. Now look at what happened next. The market moved sharply lower, exactly as expected.
[12:35] And that's it for today's video. You now know how to identify high-quality fair value gaps and how to combine them with other concepts to find better trading opportunities. Remember, don't trade every fair value gap you see.
[12:48] Be selective, wait for confirmation, and always manage your risk. If you found this video helpful, hit the like button, subscribe to the channel, and turn on notifications so you don't miss the next trading strategy.
[13:01] Thanks for watching, and I'll see you in the next video.