Speaker A
Welcome to ICT for Dummies episode 5!
Learn about Fair Value Gaps in trading, how they indicate price imbalances, and how price reacts to these gaps in bullish and bearish markets.
Ask about this video. Answers come from its transcript only — with the timestamp, so you can check them.
Generated from the transcript and can be wrong — check the timestamp.
Key Takeaways
- Fair Value Gaps signal price imbalances caused by unfilled orders and act as zones where price tends to return.
- Bearish FVGs indicate potential downward price moves, while bullish FVGs indicate upward moves.
- Price retraces into these gaps to fill liquidity before continuing the trend.
- Wick overlap is the key criterion for identifying FVGs, not the size of the gap.
- Understanding FVGs helps traders anticipate price reactions and improve entry timing.
What the video covers
- Fair Value Gaps (FVG) represent imbalances in price caused by rapid market movements where orders remain unfilled.
- FVGs act as magnets, attracting price back to these inefficiencies to fill orders, serving as support or resistance.
- A Fair Value Gap is identified using a three-candle sequence where the wicks of the first and third candles do not overlap.
- There are two types of FVGs: bearish (sell side imbalance) indicating downward price displacement, and bullish (buy side imbalance) indicating upward displacement.
- Price typically retraces to these gaps to fill liquidity before continuing in the original direction of the move.
- The presence of a wick is not mandatory for a fair value gap; body overlaps can also define FVGs.
- Examples are given to differentiate between valid fair value gaps and non-examples where wicks overlap.
- The size of the fair value gap does not matter; the key is the market motion and order flow dynamics.
- Price action in both bullish and bearish trends involves retracements into fair value gaps before continuation.
- The video includes real-time chart examples illustrating the formation, trading into, and reaction from fair value gaps.
Chapters
- 00:00Introduction to Fair Value Gaps
- 00:52Clarifying Episode Number and Tone
- 03:12What is a Fair Value Gap?
- 03:48Price Imbalances and Market Inefficiencies
- 04:18Defining Fair Value Gap with Candle Wicks
- 04:52Three Candle Sequence Explanation
- 05:17Sell Side Imbalance and Bearish FVG
- 06:15Bearish vs Bullish Fair Value Gaps
- 07:43Simplifying the Concept of Imbalances
- 08:24Examples of Fair Value Gaps and Non-Examples
Full Transcript — Download SRT & Markdown
Speaker A
But we just did 4!
Speaker A
You're so fucking retarded.
Speaker A
You're so retarded.
Speaker A
It's episode 5, guys.
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Welcome to Fair Value Gaps. This is where price attracts.
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Yeah.
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Welcome to Fair Value Gaps. Price taps and it usually reacts.
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It reacts.
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Doesn't matter if you're green or red.
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Green or red, homie.
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Black or white.
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People have charts that are also like black and white, and we don't discriminate.
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So for this video, we're going to be going over fair value gaps.
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What exactly is a fair value gap though?
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So a fair value gap is basically just an imbalance in price.
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So when price has huge movements in the market, we leave behind imbalances.
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Imbalances are from an inefficiency of orders getting filled.
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So what price tends to do is trade back into these inefficiencies and use them as areas of support or areas of resistance.
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So there's two different types of fair value gaps. We first have here a sell side imbalance. This is a
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bearish fair value gap, also known as a Sibby, a sell side imbalance.
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And what a fair value gap essentially is, is when the low of the first candle's wick doesn't overlap with the high of the third candle's wick.
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Or in a bullish sense, the high of the first candle's wick doesn't overlap with the low of the third candle's wick.
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Here we have it broken down into really five main components that make up a fair value gap.
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So it is a three candle sequence.
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In order to create a fair value gap, you need at least three candles.
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Candles one and three's wicks do not meet, which obviously you can see right in front of you.
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It is an imbalance in price.
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It acts as a magnet and delivers price in the corresponding direction.
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So a sell side imbalance, what this really means is the market is trying to tell you that it wants to go lower.
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A sell side imbalance shows displacement towards lower prices, right?
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This is a very fast move where orders aren't filled.
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Okay guys, so what a fair value gap is trying to tell you is that it wants to either go for lower prices or it wants to go for higher prices.
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So a bearish fair value gap is showing displacement. It's the market telling you that it wants to seek lower prices.
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And what a bullish fair value gap is trying to tell you is that it wants to seek higher prices.
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To get this sell side imbalance, you can expect it to target things like sell side liquidity.
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And what a bullish fair value gap is showing is bullish displacement in the market.
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It is telling you that price wants to seek higher prices.
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And this could be, for example, buy side liquidity.
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So if you got super freaking confused with what Blake was saying before with inefficiencies and shit and nothing really made sense in your head, all you need to know is that there is an imbalance in price that needs to be corrected, right?
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So as you can see here, if we drag out the low of this wick, you can see that it doesn't overlap with the high of this candle's wick, creating this imbalance.
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There is a gap between the low low and the high, meaning that is a bearish fair value gap.
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And if we do the same thing over here, the high of this first candle's wick doesn't overlap with the low of this candle's wick right here, meaning that it is a fair value gap.
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So as you can see here, this is not a fair value gap.
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Why? Because the low overlaps with this candle's high.
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And as you can see, there's a wick that overlaps, meaning that there's no imbalance in price.
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And this is not what a fair value gap looks like.
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And then as you can see here, this is also not an example of a fair value gap because this candle wick's high overlaps with this candle low.
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So this is not an example of a fair value gap.
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You need spacing between the wicks.
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So I decided to make you a compilation.
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So here on the right, we have essentially from the beginning of a fair value gap formation to when price actually trades into it and reacts, right?
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Because what does price do?
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Price first creates the imbalance, price trades into it, and then it reacts.
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So as you can see here, we have the formation, right?
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You have candles one, two, and three.
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Here we are talking about in a bullish sense.
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What happens is you have that separated wicks between candles one and three.
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You can see that the high of candle one and the low of candle three, both of these wicks do not meet.
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And you can see that right here, right?
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Unlike this where they're overlapping right here, they are not overlapping.
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Third, you have the actual imbalance slash fair value gap.
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So once you can identify that these wicks are not meeting, you can mark out this actual imbalance slash fair value gap.
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Price will typically trade into these levels, which you can see illustrated here with the red candle trading into this fair value gap.
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And then you can see the price reacts, right?
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So if we're trading into a bullish fair value gap, what are we expecting?
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We're expecting a bullish reaction and for price to continue trading higher.
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So let's say you're looking at a bullish chart, right?
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All bullish price action is going to contain some sort of retracements.
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When price retraces, it's typically to fill an imbalance.
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It's typically going to hit a fair value gap, right?
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So in order for price to continue higher, it needs to trade back towards these imbalances, and then it will continue delivering higher.
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And why price is doing this is again to fill orders.
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There's going to be an imbalance of orders.
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And once price retraces into this imbalance, that is where orders get filled.
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The same goes for in a bearish sense, right?
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If you are looking at a bearish chart with bearish price action, you're going to notice that as price is delivering lower, it is still retracing, correcting these imbalances, filling these orders, and then it continues to deliver lower.
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If you're looking at a bearish chart, this is what you're most likely going to see.
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You're going to see price is going to trade lower, hit these fair value gaps, and then continue trading lower, right?
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Price trades up, hits fair value gap, continues lower.
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Price trades up, hits these bearish fair value gaps, continues trading lower, right?
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And this happens over and over and over, and it will continue to push price lower.
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The same is going to apply in a bullish sense.
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If you're looking at bullish price action, you're going to notice that price will deliver higher, retrace into these bullish fair value gaps, and then continue higher, right?
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You'll see this all the time.
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Now let's show you the difference between what a fair value gap and not a fair value gap looks like in real time.
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All right, so now we're going to play through price and show you what fair value gaps actually look like on the chart.
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So I want you guys to know also that there doesn't actually have to be a wick.
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As you can see here, this body does not overlap with this candle's high here, and this is still a fair value gap.
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You can imagine there being a wick here, and as you can see, these wicks do not overlap, making this a bearish fair value gap.
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Another bearish fair value gap right here.
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And as you can see here, this is not a bearish fair value gap.
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Why? Because this wick overlaps with this candle's wick right here.
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So this is not a bearish fair value gap.
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Then trade into this bearish fair value gap.
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And as you can see here, we then created a bullish fair value gap.
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Why? Because candle one's wick does not overlap with candle three's wick.
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As you can see, this is a bullish fair value gap or a BISI, a buy side imbalance because candle one's wick does not overlap with candle three's wick, right?
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The high of candle one's wick does not overlap with the low of candle three's wick, making this a bullish fair value gap.
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And as you can see here, there are no fair value gaps getting made because all of these wicks are overlapping.
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And now, now for the most commonly asked question.
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Does the size of a fair value gap matter?
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Well, to answer your question.
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Yo, yo, yo.
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No, it doesn't, guys.
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It's all about the motion of the ocean, right?
Topics:Fair Value GapSell Side ImbalanceBuy Side ImbalancePrice ImbalanceOrder FlowTrading RetracementSupport and ResistanceICT TradingMarket InefficiencyPrice Action
