An Introduction to Fair Value Gap (FVG)

An Introduction to Fair Value Gap (FVG) Note Before starting this lesson make sure you're familiar with supply and demand levels in Lesson 1. What is a Fair Value Gap? A fair value gap is a liquidity void in the market that has price efficiency. Areas in the market that only offer one participant that tends to fill the remaining participants at a later time. More sellers than buyers; more buyers than sellers. Criteria 1. Consolidation: Price consolidates and forms a supply/demand prior to breaking. 2. Manipulated Expansion: Price trends in one direction in a sudden movement disregarding formed levels in between. 3. Price Retracement: Price slowly retraces to previously formed supply/demand filling the price inefficiencies. Example 1: Bearish Case 1. Consolidation Price consolidations for a period of time. Between consolidation, we have bracketing orders. Orders are being traded between a set range constantly exchanging hands. At the same during this consolidation, we have bigger market players filling their positions. In this example, we have a consolidation that led to bigger role players filling their longs in a long period of time. Prior to the up move, we form a demand level. (Heavy selling to lure retail to short to quickly offset a break to the upside.) 2. Manipulated Expansion: Rather than creating a series of HH/HL, price instead quickly expands disregarding resistance on the way up. The market's goal is to lure traders. During this break in the market, we can clearly foretell that it was a manipulated move in the fashion that it broke straight up instead of a more organic move up. This price pole is heavily favored towards long sides and didn't give any period of time for short positions to fill. Participants get lured into thinking that we are breaking out and start longing this period of price action at the top while those who filled long positions below start unloading their positions on retail while filling their short positions. 3. Price Retracement The price slowly retraces the breakout move to the origin of the move which in this case would be formed daily demand. Considering the nature of the breakout and how quickly it happened we can assume that this was only a long-driven move in the market. Longs being filled out weighting the market and the sentiment as price retraces market role players start filling shorts to fill the price inefficiency. Example 2: Bullish Case 1. Consolidation Price consolidations for a period of time. Between consolidation, we have bracketing orders. Orders are being traded between a set range constantly exchanging hands. At the same during this consolidation, we have bigger market players filling their positions. In this example, we have a consolidation that led to bigger role players filling their shorts in a long period of time. Prior to the down move, we form a supply level. (Heavy buying to lure retail to long too quickly offset a break to the downside.) 2. Manipulated Expansion: Rather than creating a series of LH/LL, price instead quickly expands disregarding support on the way down. The market's goal is to lure traders. During this break in the market, we can clearly foretell that it was a manipulated move in the fashion that it broke straight down instead of a more organic move down. This price pole is heavily favored towards the short side and didn't give any period of time for long positions to fill. Participants get lured into thinking that we are breaking down and start shorting this period of price action at the bottom while those who filled short positions above start unloading their positions on retail while filling their long positions. 3. Price Retracement The price slowly retraces the breakdown move to the origin of the move which in this case would be formed daily supply. Considering the nature of the breakdown and how quickly it happened we can assume that this was only a long-driven move in the market. Shorts are being filled out weighting the market and the sentiment as price retraces market role players start filling longs to fill the price inefficiency.