Core Definition
"What is a fair value gap? It is a range in price delivery where one side of the market liquidity is offered and typically confirmed with a liquidity void on the lower time frame charts in the same range of price"
"Price can actually gap to create a literal vacuum of trading thus posting an actual price gap"
Paint Brush Analogy
"Imagine that paint brush analogy I've used many times in the past. On the down candle that creates the lowest low here, there's a range with the candle before it and the candle after it, where it has left a pocket of porous price action or only delivered on the downside"
"We're going to expect price to eventually want to trade back up into that little gapped area"
Identifying a Fair Value Gap
Three-Candle Pattern
"We have a range left that's open and it specifically is this area right in here. So we're delineating the low of the previous candle and the high of the candle to the right of the down candle that creates that little pocket of space"
"Inside of that blue shaded area, that is what is commonly referred to in my work as a fair value gap"
Buy Side vs Sell Side Liquidity
"If it came off that low to have a higher close on that candle, that means the buy side liquidity had been offered on that range between 105.15 to 105 big figure"
"The open to the high on this candle has offered buy side liquidity as well, so we have seen price offered on the up movement or buy side liquidity on two candles: one to the left of our fair value gap creating down candle on the daily chart and one candle to the right of it where we saw price move higher in portion of that down candle"
"That area in here, that's where we're looking to see it fill in. That's the nature of a fair value gap"
Daily Chart Example - EURUSD
"It's about a 20 pip range on the daily"
"Between 105 big figure down to 104.75, about 25 pips, that is our fair value gap and it's been left open. There's been no trading outside of the movement of that range except for that down candle and no up movement at all on this time frame"
Daily Chart FVG Structure
"The candle to the left of the down candle we're looking at that comprises the fair value gap, that's this candle here. We have the higher bearish candle and I'm drawing attention to the fact that it has a down close but it's come off the low. So we're looking at the low up to the close, that little wick in there"
"That price range has been traded up into once already, delivering the buy side liquidity. In other words, on this candle's low up to the close, price had come off that low"
"So that means when we look at the down candle that makes the fair value gap, we're not concerned with the 105.15 to 105 big figure price range"
Upper Boundary: 105.00
Lower Boundary: 104.75
Range: 25 pips
4-Hour Chart Example - Gap Closure
"We have a low delineated for potential liquidity run on sell stops below the low. Price does in fact go down below that previous low and well now we can expect to see what form? A turtle soup or false break below an old low"
"Why would we reasonably expect it to go back up to fill in that gap? Well because we've already taken the sell side liquidity out by running an old low"
"We have equal highs here delineated also on our chart on a four hour basis and right above those equal highs we have our fair value gap"
"Eventually price does in fact trade back up, closes the fair value gap in, that trade or that idea is now complete"
Trading Context
"While it doesn't look like a great deal of money or pips offered, it's a very highly profitable and probable condition in the marketplace where we can see these fair value gaps and double tops where buy stops will be resting above it"
"If you see a turtle soup run below an old low, you're in a range. This time of year going into the end of the 2006 trading year going into the holidays, uh trading is going to be range bound and when you're in a range bound consolidation type format or profile for the marketplace, this is the style trading you want to be doing: looking for stops and looking for fair value gaps"
"It was well over 100 pips of a move and it only took about two days to complete that little price swing"
"This range of price action in the form of a fair value gap was actually detailed to you in the beginning of this week, where we delineate it on the daily chart, the fair value gap as outlined here, and on the daily chart you can see it's been filled in here"
15-Minute Chart - Precision Entry
"Here's the first time it trades up into that 104.75 level, closing that fair value gap, and then here's the second time it trades up into it running out the previous high"
"The previous high this time was at 104.77. This candle's high comes in at 104.78, so it trades to it just by one pip"
Gap Creation on 15-Minute Chart
"We have a down candle here, a lot of movement lower but it comes off that low. Watch what happens now - we gap. We get from this candle's close 104.72 to an opening on this candle of 104.70"
"Now it's only two pips difference but that creates a what? A gap. So we can be a seller at a more refined price level mentioned in earlier time. We said that we could be a seller at 104.70 on a limit"
Perfect Efficiency
"Look at the body's close on this candle right here - the close is 104.72. That's exactly the high on this candle's close, 104.72. The wick trades through the body, but the bodies of the candle completely close in here"
"So this gap between these two candles, these two black down candles, this gap in between the bodies have perfectly been filled in with this up candle. So this is exactly what I'm referring to as efficiency in terms of the price delivery"
"When price trades back up to that level, if it doesn't give us an opportunity to go on a limit, we can trade it right as it hits it. If we can be in front of the charts right there, there's your sell"
5-Minute Chart - Liquidity Void Detail
"I want to just draw a special attention to this area up here. And now I'm going to show you what it looks like when we have a run above an old high which is what this is, 104.75. It's also run on liquidity in the form of a liquidity pool, so it's running buy stops, but also it's hitting that fair value gap also"
Lower Timeframe Manifestation
"In lower time frames many times this will create a liquidity void. You see a movement lower here on this candle, and then we have another candle here - look what happened. The next candle's open is down here, so you have this gap in here"
"So price trades up into that and closes that in right there"
"When we're looking at fair value gaps, okay it's important to remind you that if we're studying a specific time frame, the gap occurs on the time frame you're looking at. You can break this down further into smaller time frames but in the smaller time frames you'll probably end up seeing a liquidity void where the gap would be indicated here on this time frame. On a lower time frame it would many times appear as a liquidity void where it's multiple candles that create that open space of range"
Buy Side vs Sell Side Liquidity
Understanding Liquidity Delivery
"So if it came off that low to have a higher close on that candle, that means the buy side liquidity had been offered on that range between 105.15 to 105 big figure"
"The low up to the close, buy side was offered here and buy side was offered from the opening to the high here, so there's a gap closure here on all the downside movement here. So this has all been closed in"
Identifying Which Side is Offered
"Price had come off that low. So if it came off that low to have a higher close on that candle, that means the buy side liquidity had been offered"
"From the opening to the high is buy side liquidity offered"
"It's all sell side liquidity at this moment here. It's all sell side now, nothing over here until we get over here, so we created a gap down here"
"This movement lower has been offered on the downside. Okay now think, look closely. This candle is high comes in at 104.78, the close is at 104.75. The next candle it opens at 104.74 and then it creates a high at 104.76, so it moves two pips up. So from the opening to the high is buy side liquidity offered, then it trades down for a down close, then we gap down here"
Efficiency in Price Delivery
"So this is exactly what I'm referring to as efficiency in terms of the price delivery. If this movement lower has been offered on the downside"
Complete Delivery - Both Sides
"So efficiently we could look for this range being delivered lower. We have to consider back here where price was delivered on the buy side here. So this low comes in at 104.55, so if we drop that down to there, 104.55, that's where the last point at which the low had traded up to the close. So buy side liquidity has been delivered"
"It's a full block of delivery deficiency. Up and down both ranges on both sides of the delivery of price, buy and the sell side have been offered in here from this low to this high. Once we break this low here, we're all on sell side now"
Perfect Execution Point
"It comes right back to it here. Perfect delivery, efficiently priced at 104.55. Does it twice. Time to sell it off and wait for it to run the sell stops below this low and this low down here"
"Look at the high on that candle, 104.55. The low on this candle, 104.55. The buy side all green candles up, then it comes down. So this is all efficiently traded"
"Perfect delivery. Efficiently priced at 104.55. Does it twice. Time to sell it off and wait for it to run the sell stops below this low and this low down here. Right there. And watch the delivery. Boom. Perfect. So perfectly delivered down into the sell stops below the low lows"
Trading Application
Range-Bound Trading Strategy
"This time of year going into the end of the 2006 trading year going into the holidays, uh trading is going to be range bound and when you're in a range bound consolidation type format or profile for the marketplace, this is the style trading you want to be doing: looking for stops and looking for fair value gaps"
Entry Methods
"So we can be a seller at a more refined price level mentioned in earlier time. We said that we could be a seller at 104.70 on a limit"
"When price trades back up to that level, if it doesn't give us an opportunity to go on a limit, we can trade it right as it hits it. If we can be in front of the charts right there, there's your sell"
Probability & Profitability
"While it doesn't look like a great deal of money or pips offered, it's a very highly profitable and probable condition in the marketplace where we can see these fair value gaps and double tops where buy stops will be resting above it and if you see a turtle soup run below an old low, you're in a range"
"It was well over 100 pips of a move and it only took about two days to complete that little price swing"
FVG Overlap with Other Concepts
"I mentioned that the gaps, fair value gaps, liquidity voids, order blocks and liquidity pools, they kind of overlap a lot in a lot of different ways that you're probably not aware of yet"
FVG + Liquidity Pool
"I'm going to show you what it looks like when we have a run above an old high which is what this is, 104.75. It's also run on liquidity in the form of a liquidity pool, so it's running buy stops, but also it's hitting that fair value gap also. So straight into the fair value gap"
FVG + Liquidity Void
"When we're looking at fair value gaps, okay it's important to remind you that if we're studying a specific time frame, the gap occurs on the time frame you're looking at. You can break this down further into smaller time frames but in the smaller time frames you'll probably end up seeing a liquidity void where the gap would be indicated here on this time frame. On a lower time frame it would many times appear as a liquidity void where it's multiple candles that create that open space of range"
"So hopefully this has been a little bit more insights into how the liquidity pools and liquidity voids and fair value gaps draw together in an overlapping scenario"
Study & Review
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