Fair Value Gap Trading Strategy
Updated
Fair Value Gap Trading Strategy
To implementing a fair value gap as a trading strategy you need to understand these three basic components of this trading strategy.
Time
Liquidity Hunt
Market Structure Shift
Fair Value Gap
Let’s begin by discussing the importance of time in trading. According to ICT Trader, time is considered to be fractal, meaning that what happens on higher time frames is reflected in lower time frames if studied in the proper context.
In this context, fractal refers to the idea that patterns and behaviors observed on longer time frames, such as daily or weekly charts, can be seen in shorter time frames, like hourly or minute charts.
By studying price action and market behavior across different time frames, traders can gain a deeper understanding of market dynamics and potentially identify profitable trading opportunities.
Time indeed holds significant importance in the fair value gap trading strategy, particularly when it comes to identifying favorable trading setups. Despite the forex market being open 24 hours a day, not all times present ideal conditions for executing fair value gap trades. That’s where the concept of ICT Kill Zones comes into play.
ICT Kill Zones
ICT Kill Zones refer to specific time periods during the day that have been observed to offer higher probability trading opportunities. These zones are associated with the entry of smart money, which are institutional or banks who have the ability to influence market direction.
In short, ICT Kill Zones correspond to specific time periods during the day that are particularly relevant for trading activities. These zones include the London Open, London Close, New York Open, and New York Close.
Traders using the fair value gap trading strategy often focus on these times as they tend to offer higher probability trading setups. The ICT Kill Zones are associated with the entry of smart money and can provide enhanced opportunities for traders to capitalize on market movements. By aligning their trading activities with these specific time periods, traders aim to improve their chances of success.
Liquidity in FVG Trading Strategy
Liquidity in the market often takes the form of buy stops and sell stops.market makers or smart money intentionally trap retail traders by manipulating prices to trigger their stop losses.
The idea is that they move the market in one direction to hunt for stop losses, causing retail traders to place orders in the false direction and set their stop losses at key levels. After the stop loss hunt, the market reverses in the opposite direction, benefiting the smart money.
Let’s analyze the above chart from a retail trader’s perspective. When we observe the chart, we notice that the price levels between 44240 and 44280 have proven to be strong resistance in the past.
Based on this observation, many retail traders might place their selling pending orders to anticipate of a price reversal at these levels. To manage their risk, they would likely set their stop loss orders just above this resistance area.
What is done by market makers or smart money,they could manipulate the market by initially pushing the price upward, deliberately triggering the stop loss orders placed by retail traders. This action would cause some retail traders to think that a breakout is occurring and prompt them to place buying orders while setting their stop losses at levels below the resistance area.
Once the stop loss orders have been hunted and triggered, the market makers or smart money may then reverse the price direction.
Enhancing Trading Success with the Fair Value Gap Entry Strategy
After a liquidity hunt on a higher time frame, you suggest switching to lower time frames such as 15 minutes, 5 minutes, 3 minutes, or even 1 minute to identify certain patterns that may emerge following the stop loss hunt. These patterns include:
1.Sudden or sharp price movements: Following the liquidity hunt, you may observe rapid and significant price fluctuations on the lower time frames.
This sharp movement causing market structure shift and provide an extra confluence.
2. Fair value gap (FVG): Look for gaps between the current price and the fair value of the asset. The fair value represents the equilibrium price based on various factors. Identify instances where the market price deviates significantly from this fair value.
3. Entry position based on the Fair Value Gap strategy: Once you spot a fair value gap pattern after the liquidity hunt, you can consider taking a position in anticipation of the market filling that gap. The expectation is that the market will eventually return to the fair value price.
It’s important to carefully train your eyes to recognize these patterns after a liquidity hunt and patiently wait for the market to come back and fill the identified gap. Once you have identified a suitable entry position, you can place your stop loss order above the first candle to manage your risk.
Please note that implementing such strategies requires careful analysis, experience, and a deep understanding of the specific market you are trading. It’s crucial to conduct thorough research, backtest your strategy, and consider other factors that may influence price movements before making any trading decisions.
To implementing a fair value gap as a trading strategy you need to understand these three basic components of this trading strategy.
Time
Liquidity Hunt
Market Structure Shift
Fair Value Gap
Let’s begin by discussing the importance of time in trading. According to ICT Trader, time is considered to be fractal, meaning that what happens on higher time frames is reflected in lower time frames if studied in the proper context.
In this context, fractal refers to the idea that patterns and behaviors observed on longer time frames, such as daily or weekly charts, can be seen in shorter time frames, like hourly or minute charts.
By studying price action and market behavior across different time frames, traders can gain a deeper understanding of market dynamics and potentially identify profitable trading opportunities.
Time indeed holds significant importance in the fair value gap trading strategy, particularly when it comes to identifying favorable trading setups. Despite the forex market being open 24 hours a day, not all times present ideal conditions for executing fair value gap trades. That’s where the concept of ICT Kill Zones comes into play.
ICT Kill Zones
ICT Kill Zones refer to specific time periods during the day that have been observed to offer higher probability trading opportunities. These zones are associated with the entry of smart money, which are institutional or banks who have the ability to influence market direction.
In short, ICT Kill Zones correspond to specific time periods during the day that are particularly relevant for trading activities. These zones include the London Open, London Close, New York Open, and New York Close.
Traders using the fair value gap trading strategy often focus on these times as they tend to offer higher probability trading setups. The ICT Kill Zones are associated with the entry of smart money and can provide enhanced opportunities for traders to capitalize on market movements. By aligning their trading activities with these specific time periods, traders aim to improve their chances of success.
Liquidity in FVG Trading Strategy
Liquidity in the market often takes the form of buy stops and sell stops.market makers or smart money intentionally trap retail traders by manipulating prices to trigger their stop losses.
The idea is that they move the market in one direction to hunt for stop losses, causing retail traders to place orders in the false direction and set their stop losses at key levels. After the stop loss hunt, the market reverses in the opposite direction, benefiting the smart money.
Let’s analyze the above chart from a retail trader’s perspective. When we observe the chart, we notice that the price levels between 44240 and 44280 have proven to be strong resistance in the past.
Based on this observation, many retail traders might place their selling pending orders to anticipate of a price reversal at these levels. To manage their risk, they would likely set their stop loss orders just above this resistance area.
What is done by market makers or smart money,they could manipulate the market by initially pushing the price upward, deliberately triggering the stop loss orders placed by retail traders. This action would cause some retail traders to think that a breakout is occurring and prompt them to place buying orders while setting their stop losses at levels below the resistance area.
Once the stop loss orders have been hunted and triggered, the market makers or smart money may then reverse the price direction.
Enhancing Trading Success with the Fair Value Gap Entry Strategy
After a liquidity hunt on a higher time frame, you suggest switching to lower time frames such as 15 minutes, 5 minutes, 3 minutes, or even 1 minute to identify certain patterns that may emerge following the stop loss hunt. These patterns include:
1.Sudden or sharp price movements: Following the liquidity hunt, you may observe rapid and significant price fluctuations on the lower time frames.
This sharp movement causing market structure shift and provide an extra confluence.
2. Fair value gap (FVG): Look for gaps between the current price and the fair value of the asset. The fair value represents the equilibrium price based on various factors. Identify instances where the market price deviates significantly from this fair value.
3. Entry position based on the Fair Value Gap strategy: Once you spot a fair value gap pattern after the liquidity hunt, you can consider taking a position in anticipation of the market filling that gap. The expectation is that the market will eventually return to the fair value price.
It’s important to carefully train your eyes to recognize these patterns after a liquidity hunt and patiently wait for the market to come back and fill the identified gap. Once you have identified a suitable entry position, you can place your stop loss order above the first candle to manage your risk.
Please note that implementing such strategies requires careful analysis, experience, and a deep understanding of the specific market you are trading. It’s crucial to conduct thorough research, backtest your strategy, and consider other factors that may influence price movements before making any trading decisions.
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