Fair Value Gaps: 6 Filters for Valid Trades — Step-by-Step Guide & Transcript

[00:00] going on in trading space right now. And there s a reason for that   Because of how well they work in the market. But not all fair value gaps are created equal.   And this fair value gap did end up working. So why did this fair value gap work  

[00:19] secret technique I use to instantly tell  me when a fair value gap becomes valid.   And once you add this technique to your  arsenal, you will instantly see your   fair value gaps become more accurate. To begin, we first have to go over what  

[00:35] a fair value gap actually is. We can have bullish fair value   gaps and bearish fair value gaps. A fair value gap is simply when price moves up   quickly. Creating this humongous green candle. The price moved up so quickly, that it actually  

[00:50] didn t give sellers enough time to counteract the  movement. Creating an imbalance in the market.   You can mark a fair value by simply marking  the candles top wick before the big move,  

[01:03] to the candles lower wick after the big move. This zone is the fair value gap itself.   Often times price will come back down to  this zone, fill the imbalance, and retrace  

[01:17] and profit off this move. But if you ve ever traded   fair vale gaps before, you ll quickly  notice, it doesn t work 100% of the time.  

[01:29] This is because you ve probably  traded an invalid fair value gap.   But what makes a fair value gap valid? Well, theres actually 6 key factors that need   to be true in order for a fvg to be valid. The first one is the fair value  

[01:43] gap must be unmitigated. What I mean by that is since the whole   point of a fair value gap is to have price surge  and not give the opposite side a chance to react.   This zone must not be tested  in order for it to work.  

[01:57] Price came back down to it directly after. Then continued to rise.   So if price comes back down to this zone again. We would not consider this fair value gap  

[02:09] valid as its already been tested here. If you want a fair value gap to be valid, it must   we shouldn t trade around it. Moving on to point number two.   The 2nd way to see if a fair value gap is  valid is by making sure to check the reaction  

[02:24] of the candle inside the fair value gap. We want the reaction of the candle to either   close inside of the fair value gap or for  it to close in the direction of the zone.   So here, the candle broke through the fair  value gap and ended up closing below the gap.  

[02:39] If this happens, this makes the gap invalid. What we want to see is something like   this. Where price close in the fair  value gap. Giving us a safe entry.   It s okay if a wick goes through  the fair value gap like this,  

[02:51] but ends up closing inside the gap. As long as the candle is closing   inside the gap or in the direction of  the gap. We are good for an entry.   One way to make sure you are trading a strong  fair value gap is by adding other confluences.  

[03:07] So here on the chart, price made an  untested bullish fair value gap.   But if we look closely we can see  price created a support over here.   And it also just so happens to be right  in the middle of the fair value gap.  

[03:23] This is a great confluence and will raise  the chances of this value gap to work.   Same thing with bearish value gaps. You want to find a prior resistance that   you gaps a lot stronger. Moving onto factor number four.  

[03:38] As I was saying before, some fair value gaps are  stronger than others and have more priority.   An easy way to do this is to mark the fair  value gaps by where they are on the chart.   The lowest fair value gap will always be  strongest and have the highest priority.  

[03:55] While the highest fair value gap will be  the weakest and have the lowest priority   So in a perfect scenario, you should try to  trade the lowest fair value gap possible.   Same thing with bearish value gaps. If you have multiple bearish fvgs on one chart.  

[04:09] This will really help your chances  of find the one that works.   Moving onto factor number 5. Factor number 5 goes along with factor number 4.   What you want to do is go on a tradingview  and pick this gann box tool right here.  

[04:26] Go to the settings of it and make sure  the price levels are 0, 0.5, and 1.   If you have multiple fair value gaps on a  chart, just grab this tool and mark from the  

[04:39] low of the move, to the high of the move. This will give you an easy way to see what   you should not be trading any fair value gaps  that are in the upper portion of this tool.  

[04:51] You only wan to be trading gaps that  are in the lower portion of this tool.   You only want to be trading fair values  that are in the upper portion of this tool.   If you follow this step you will only be  trading high priority fair value gaps.  

[05:06] Moving onto the 6th and final factor. But before that, I m about to share   every time I enter a trade. I share my analysis  on the specific trade and why I m entering.  

[05:19] I send this email every Wednesday and Friday  and there are some absolute gems about the   shared last week which up 27%. The best part is, its absolutely free to  

[05:32] sign up and you can cancel anytime. No catch. If you want to sign up, I ll leave a   link to in the description. Go check it out. Okay lets go back to the 6th and final step. When trading fair value gaps, you should have  a break of structure before the gap is made.  

[05:45] A break of structure is simply when price  breaks the high low, that it previously made.   So in this example, price created a fair  value gap, but it did not create a break   of structure because it did not break this  high. So we would not trade this gap.  

[06:00] What we want is something like this. For  bullish fair values, price should break   the high it previously made, and while doing  so it, it will probably create a fair value   gap. This gap will now be valid because  it did a break of structure of this high.  

[06:13] of the previous low before creating the gap. If you combine all 6 of these steps together,   it will create the ultimate fair value gap. And will greatly increase the chance of  

[06:26] respecting this zone so you can profit from it. So here is a live a trade example of doing so.   First we see made price made this high, so  this will be our break of structure point.   We wait and make sure price breaks this  high so we have a break of structure.  

[06:40] Next, we wait for a fair value gap to be created. We then make sure this fair value gap is   unmitigated and hasn t been touched before. So in this example, we are good so far.   That way we can see which  gaps we should be targeting.  

[06:56] We then grab our gann box tool and  mark from the low to the high.   so we can remove this gap from our chart  as we don t want to be trading it anyway.  

[07:08] And if we look closely, we can also  see there is a support that just so   all of the criteria of being a valid value gap. We wait for price to come down to this zone.  

[07:20] Once it reaches this zone, we make sure the candle  either closes in the zone or above the zone.   Which in this example, price did exactly that and  is starting to show that it respects this zone.   All 6 of our criteria is met and we now  know this is a valid gap and has a great  

[07:36] of the move and set our stop loss at the low  of the candle that made the fair value gap.   And just as we expected price boomed  right after touching the fair value gap  

[07:48] and it gave us a beautiful winning trade. Combine all 6 of these steps together and   Hope you got some value from this  video. See ya next time.