You Are Trading the Wrong Fair Value Gaps — Transcript

Full transcript

1. 0:00Most traders are trading fair value gaps
2. 0:02blindly. They identify a three candle
3. 0:05pattern, the gap between candle one and
4. 0:08candle three. They'll mark out a box and
5. 0:10then they'll treat them all the same.
6. 0:12Then you start to wonder if you're doing
7. 0:14that, you start to wonder why some fair
8. 0:16value gaps work and other times some
9. 0:18fair value gaps completely fail. The
10. 0:20problem is not fair value gaps. The
11. 0:23problem is that most people are trading
12. 0:25fair value gas without really
13. 0:26understanding what actually happened
14. 0:28inside of that candle and understanding
15. 0:31the concept around what an inefficiency
16. 0:34or a fair value gap or gap of fair value
17. 0:38really stands for and what it's supposed
18. 0:40to mean. So, in this video, I'm going to
19. 0:43break down the auction mechanics behind
20. 0:45fair value gaps using orderflow. And I'm
21. 0:48going to explain why some fair value
22. 0:49gaps are much higher quality than other
23. 0:51fair value gaps, even though they might
24. 0:53look identical on candlesticks.
25. 0:58So, if you ever trade fair value gaps,
26. 1:00you've probably noticed that you can
27. 1:01mark out boxes all over the place. You
28. 1:03can find fair value gaps everywhere uh
29. 1:05based off of the candlestick pattern.
30. 1:08You identify a three candle pattern. You
31. 1:11find a gap between candle one and candle
32. 1:14three and then you draw a box and boom,
33. 1:16now you got a fair value gap. So then
34. 1:19when traders draw this fair value gap
35. 1:20out on their chart, doesn't matter what
36. 1:22time frame it is, they see the three
37. 1:24candle pattern, they're just going to
38. 1:25assume price has to rebalance it or
39. 1:27price should reject from it or the 50%
40. 1:30level of this fair value gap or the CE
41. 1:33is a valid entry. And that's actually
42. 1:35where most people go wrong because the
43. 1:38common misunderstanding behind fair
44. 1:40value gaps is that they're not actually
45. 1:42identified by structure alone. Most
46. 1:45traders might see a displacement candle
47. 1:47and they label it an imbalance, but a
48. 1:50displacement does not automatically mean
49. 1:52that it's an inefficiency in the market.
50. 1:55Two displacement candles can look
51. 1:56identical and they can represent totally
52. 1:59different options. So let's talk about
53. 2:02what is actually a fair value gap. It's
54. 2:05not just a box on your chart. What is
55. 2:08actually a fair value gap? Well, the
56. 2:10term fair value gap is not just a name.
57. 2:11We got to think a gap of fair value. So
58. 2:14what is it supposed to represent?
59. 2:16Supposed to represent that price is
60. 2:18moving faster than participation or
61. 2:21areas where trade was skipped or
62. 2:23incomplete price discovery. So in other
63. 2:25words, what a fair value gap is
64. 2:27referring to is actually an inefficient
65. 2:29auction.
66. 2:30Candles show the result of that auction,
67. 2:32but order flow shows whether price was
68. 2:34accepted or rushed through that area.
69. 2:36And so candlestick
70. 2:38charts fall short when trying to
71. 2:41identify inefficient auctions because
72. 2:44they don't show how much volume was
73. 2:45traded inside the move. They're not
74. 2:48showing whether buyers and sellers both
75. 2:50participated in that move and whether
76. 2:52trade was thick or thin in that area.
77. 2:55And that type of information actually
78. 2:57matters because markets behave different
79. 3:00after acceptance versus a rush move.
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114. 4:06get back into the video. So then, how do
115. 4:08we actually identify a high quality fair
116. 4:10for a value gap? Well, this is an image
117. 4:12of what I would consider to be a high
118. 4:15quality for value gap. On the left, you
119. 4:17see that price displaces very quickly.
120. 4:19You don't see rotation. There is no
121. 4:21acceptance and price basically doesn't
122. 4:24spend a lot of time in this area. It
123. 4:26trades very quickly through this area.
124. 4:29When you look inside of the candle, what
125. 4:31you're going to notice is that volume is
126. 4:33very thin within this candle. There are
127. 4:34some parts of this candle where it looks
128. 4:36like volume barely exists. So, what
129. 4:38we're looking at is we're looking at
130. 4:39very thin participation within this
131. 4:42displacement where volume is not
132. 4:43building and the auction never really
133. 4:45forms here. So this is the definition of
134. 4:48what is considered an inefficient move.
135. 4:50And it does not mean that price
136. 4:51necessarily has to come back to it. But
137. 4:54if it does come back to this area, then
138. 4:56it actually makes sense for us to watch
139. 4:58because price skipped this area the
140. 4:59first time. And if we're looking at a
141. 5:01footprint chart, one thing that you will
142. 5:03notice in true inefficient auctions is
143. 5:05you will usually have stacked
144. 5:07imbalances. Now, they're not required,
145. 5:09but you'll typically find them here. Now
146. 5:11what that means is that you see a large
147. 5:12proportion of sellers hitting the bid
148. 5:14over buyers and they usually fall within
149. 5:16low volume nodes and that is important
150. 5:18to note for later because this is an
151. 5:21example of displacement that basically
152. 5:23left behind poor participation. And this
153. 5:26is why I would consider this a fair
154. 5:29value gap that has higher information
155. 5:31quality because when we're looking for a
156. 5:33higher quality fair value gap. When you
157. 5:36see the displacement candle on a
158. 5:38footprint or volume profile, you're
159. 5:40often going to see things like a low
160. 5:42volume node, thin participation in the
161. 5:44move, strong initiative buying or
162. 5:47selling, and often stacked or clustered
163. 5:50imbalances near the low volume area,
164. 5:53which is right here. And then now we see
165. 5:55the cluster or stack of imbalances near
166. 5:58this low volume area. So this is going
167. 6:00to tell you that price basically moved
168. 6:02through this area without much
169. 6:04opposition. And this is the kind of
170. 6:06imbalance that actually tends to matter
171. 6:08later on when we're looking to trade
172. 6:11something like this. Now let's talk
173. 6:12about a lowquality fair value gap
174. 6:14because they can look exactly the same
175. 6:16if you're just using candlesticks. On a
176. 6:19lower quality fair value gap, volume is
177. 6:22present through the entire move as you
178. 6:24can see with the volume profile within
179. 6:26this candlestick. And there's two-sided
180. 6:29participation that's visible. We have
181. 6:31two fair value gaps right here.
182. 6:33Technically, there is a gap right here
183. 6:35that you would see on a candlestick
184. 6:37chart where someone might mark this out
185. 6:38as a fair value gap or someone might
186. 6:40mark this out as a fair value gap. Yes,
187. 6:42it does look like displacement, but when
188. 6:44you look inside of the move, there's
189. 6:46plenty of volume in two-sided trade. So,
190. 6:48what that means is that the market did
191. 6:50not actually skip this area. It actually
192. 6:52just traded right through it. It just
193. 6:54traded through it. And because of that,
194. 6:55there's less reason for price to want to
195. 6:57come back and rebalance this and much
196. 6:59less reason for price to have a clean
197. 7:01rejection off of this. And if you mark
198. 7:03this fair value gap out just based off
199. 7:05of the candlestick structure and we ran
200. 7:07through this, then you would be
201. 7:08wondering to yourself, why did that
202. 7:10happen? Why did this fair value gap not
203. 7:12work? Oh, now this fair value gap turned
204. 7:13to an inverse fair value gap and we'll
205. 7:15try and trade that. We can just see
206. 7:17through order flow that buyers and
207. 7:20sellers were interacting inside of the
208. 7:22candle body and there was evidence of
209. 7:24responsive activity from both parties.
210. 7:26So not just initiative flow. There's no
211. 7:28true low volume nodes within this volume
212. 7:31profile and basically no area where
213. 7:33price rushed through this uncontested.
214. 7:35And this is important because
215. 7:37displacement does not necessarily equal
216. 7:40inefficiency. This is displacement with
217. 7:43acceptance. There is a difference and we
218. 7:46need to understand that so that we can
219. 7:48take higher quality setups using fair
220. 7:51value gaps. Now it may look like a fair
221. 7:54value gap on a chart on a candlestick
222. 7:56chart but when you actually look inside
223. 7:58it the market already traded here and
224. 8:01many fair value gaps actually look
225. 8:02pretty good on the chart if you're
226. 8:04looking at a candlestick chart but they
227. 8:06typically show heavy volume throughout
228. 8:08the candle two-sided trade inside the
229. 8:11move and potential signs of absorption.
230. 8:13So if price displaced but value was
231. 8:16already accepted then these areas are
232. 8:18much less likely to rebalance and reject
233. 8:20cleanly. Now a lot of newer traders
234. 8:22often like to look at fair value gaps
235. 8:24and they treat them all the same. Um and
236. 8:27that's actually going to hurt you as a
237. 8:28trader because they are not all the
238. 8:30same. So newer traders might often mark
239. 8:33out every fair value gap for whatever
240. 8:35time frame they're on. They use the same
241. 8:37entry logic every time and they're going
242. 8:39to expect the same outcome every time.
243. 8:42But markets do not rebalance patterns.
244. 8:45They rebalance inefficiency.
245. 8:47I'm gonna say that again. Markets do not
246. 8:51rebalance candlestick patterns. They
247. 8:54rebalance inefficiency. And if
248. 8:56participation was already there, then
249. 8:59there is nothing for price to fix. That
250. 9:02is very important for you to understand
251. 9:04if you're going to be trading a concept
252. 9:06around auction theory because that's
253. 9:08what a fair value gap is basically
254. 9:10talking about. It's talking about
255. 9:11auction theory. So, where do entries
256. 9:12usually go wrong? Well, most traders are
257. 9:15just going to look at a fair value gap.
258. 9:17They're going to treat it as like a
259. 9:18automatic rejection zone or maybe a
260. 9:21continuation after a rebalance or
261. 9:24they're just going to mark out the CE or
262. 9:25the 50% the equilibrium of that fair
263. 9:28value gap and they're just going to
264. 9:29blindly enter there. But they're not
265. 9:31really checking whether this area is
266. 9:34actually inefficient or if price already
267. 9:37traded heavily there. And if price did
268. 9:40trade heavily there, then there's really
269. 9:42no mechanical basis for a rejection. So
270. 9:46then how do we use order flow to
271. 9:49identify good fair value gaps? Well,
272. 9:52order flow does not create entries. It
273. 9:55just is going to filter the bad ones. So
274. 9:58better fair value gaps that we mentioned
275. 10:00earlier usually include things like
276. 10:02those clear inefficient areas from the
277. 10:05original move where price might return
278. 10:08into that low volume zone. Participation
279. 10:10is going to build on that revisit and
280. 10:12then stacked or clustered imbalances
281. 10:14will show then the control. Now the
282. 10:17trade is actually going to have
283. 10:18structure and participation behind it
284. 10:21rather than just trying to trade a
285. 10:23pattern. Okay. And I want to talk about
286. 10:25the 50% level or the CE. Now, the 50%
287. 10:29level, it's not wrong. It works, but
288. 10:32it's not special on its own because it's
289. 10:34only going to matter if it actually
290. 10:36aligns with a low volume node, if it
291. 10:38sits inside of the inefficient part of
292. 10:40the move, and if order flow is going to
293. 10:42confirm the acceptance or rejection of
294. 10:43it. Otherwise, it's literally just the
295. 10:46middle of a box. It's and like I say
296. 10:49again, it's not that it's wrong, it's
297. 10:52just incomplete without participation
298. 10:54context. So you might identify this as a
299. 10:57fair value gap. You draw it out on a
300. 10:59candlestick chart. You enter a trade
301. 11:01here and it worked. Great. That's great.
302. 11:05But did it work because there was a line
303. 11:06on your chart that was in the middle of
304. 11:08a box? No, that's not why it worked. It
305. 11:12works because if we're thinking about
306. 11:15what is happening in an inefficient move
307. 11:18or an inefficient auction sitting within
308. 11:21this middle of this fair value gap, we
309. 11:24have a low volume node and we have
310. 11:26stacked imbalances of sellers hitting
311. 11:28the bid to the downside. So this is now
312. 11:30a valid area where we would be looking
313. 11:32for a rejection if the bias was still
314. 11:34for price to go down or we would be
315. 11:37entering somewhere in this area. It just
316. 11:39so happens that the middle of this fair
317. 11:41value gap is where this low volume note
318. 11:43is sitting. And oftent times in
319. 11:45inefficient moves or displacement
320. 11:47candles that have inefficiency, you are
321. 11:50usually going to see if it's a high
322. 11:52quality fair value gap, you're going to
323. 11:54see a low volume node sitting around the
324. 11:56middle of the candle. Now, there is an
325. 11:58important clarification that I have to
326. 11:59make before I get [ __ ] ripped in the
327. 12:01comment section.
328. 12:03I'm not saying that fair value gaps
329. 12:06don't work. Now, I'm not saying that ICT
330. 12:08concepts are wrong or that candlestick
331. 12:10structure is useless. What I am saying
332. 12:13though is that candlestick structure is
333. 12:16going to show you where to look and then
334. 12:18order flow is going to show us and tell
335. 12:20us whether it's a whether it's
336. 12:22actionable. We should be trading it
337. 12:24because structure without participation
338. 12:27context is incomplete. And if you're
339. 12:29watching this video,
340. 12:31basically the main point I want you to
341. 12:34take away from this video, if you trade
342. 12:35fair value gaps, I hope you don't feel
343. 12:37attacked because there's nothing wrong
344. 12:39with fair value gaps. But just
345. 12:41understand that there are some fair
346. 12:43value gaps that are better than others.
347. 12:45And if you do use fair value gaps a lot
348. 12:46in your trading, don't treat them all
349. 12:49the same because they're not all the
350. 12:51same. We need to understand what is
351. 12:53actually happening and why is this
352. 12:55working or why is this not working? And
353. 12:58if we understand that, then we can make
354. 13:00better trading decisions. And if we can
355. 13:02make better trading decisions, then we
356. 13:03can hopefully lose less money and maybe
357. 13:05even make some money. So when you start
358. 13:07trading higher quality fair value gaps,
359. 13:09you stop treating this like a pattern
360. 13:11game and you start trading what actually
361. 13:14happened and what actually matters. So
362. 13:16if this helped you think about fair
363. 13:17value gaps differently, I will be making
364. 13:20more videos on orderflow concepts moving
365. 13:22forward. Once you stop trading patterns
366. 13:25and you start understanding
367. 13:27participation and reading participation,
368. 13:30things will become a lot more clear.