Fair Value Gap Trading: Market Structure and Liquidity Sweeps

Value gaps show where big players have entered the market and pushed the price

strongly. When price returns to these gaps,

we often see reactions that

can give us a good trading opportunity.

Here on the pound dollar one-hour chart, price tapped into the bearish fair value

gap and moved to the downside. Then it formed another FVG

and rejected to the downside again.

On the euro dollar one-hour chart, you can see how many times the price

reacted to

the fair value gap before the reversal happened.

We can apply this concept to all timeframes.

Refining a fair value gap means zooming into a lower timeframe to find a more

accurate FVG inside the larger area.

For example, if we zoom into the four-hour chart,

we can mark a four-hour

FVG inside that large daily zone. This way, instead of a large

daily imbalance, we get a tighter and more precise zone to work with.

This trading example, we have multiple fair value gaps marked on

the chart.

We are only interested in buying when the price taps into the middle one.

So why are we not interested in trading the others?

If we take the start and the end of the latest impulsive move

and apply the

retracement tool, you'll notice that the second FVG is located below the

fifty percent level, which is the discount zone, while this FVG

is located above the fifty percent level, which is the premium side of the range.

We are only interested in buying in the discount zone for multiple reasons.

Usually, the market loves to take out early buyers.

So a safer way to enter a long trade is to wait for the price to enter the

discount

This increases the chance of success and reduces the risk of becoming a

liquidity target. Also, wherever we buy, the

safest level to place the stop loss is below the swing low.

Therefore, we want to keep our stop close to

that level.

Additionally, our first target would be the recent high.

So if we enter at the first FVG, there is simply not enough room for a

proper reward. This method works best when the market makes deep

retracements. The reason we are also not interested in buying at the

lower

FVG is that if price breaks below the swing low, the market structure

shifts bearish, and a long trade would go against the

trend unless we

identify this break as a liquidity grab, in which case price might still move

higher.

The same concept applies to a bearish scenario.

Here, we have two fair value gaps. But if we apply the retracement

tool from the start of the move to the end, we can see that only the higher one

is located inside the premium zone.

So we are only interested in selling in the premium area.

This ensures a safer stop loss placement and allows for a higher reward.

Analyzing market structure on the higher timeframe.

To identify the direction, we look for breakouts, reversals,

and liquidity sweep

patterns.

Now we can see that we have multiple breaks of structure to the upside,

indicating

that the overall direction is bullish.

Then the market forms a liquidity sweep above the previous high,

signaling a potential reversal. This reversal is later confirmed once we

get

a break and close below this low, which is called a change of character

plus.

It happens when price fails to create a new high and then breaks the swing low to

the downside. This tells us that buyers have failed to defend their

positions and sellers are now in control.

A bullish liquidity sweep happens when price moves below the area

and triggers the

stop losses and then quickly comes back above the range.

When this happens, we expect a push to the upside.

Similarly, a bearish liquidity sweep happens

when price engages liquidity above a

swing point and then quickly returns below the range.

When this happens, we expect a push to the downside.

Bullish and bearish liquidity sweeps are marked respectively with green and red

circles on the chart. In the first scenario,

we have a very small fair value gap.

When this happens, you should consider using a larger zone

for your stop loss, so

it is protected from normal market fluctuations.

In the opposite scenario, we have a large fair value gap on the

lower timeframe,

and the issue here is that placing the stop below this zone

would result in a very

large stop loss. In this case, we can either use a smaller zone below the

FVG as our stop or place our buy order in the middle of the zone.

By doing this, our risk to reward ratio improves

significantly if the

trade ends up being a winner. On the euro dollar one-hour chart, we

were in a clear downtrend until we saw a liquidity sweep followed by a change of

character.

Both of these signals indicate that sellers are no longer in control

and that our

directional bias has turned bullish.

On this chart, we can identify two fair value gap areas,

but only the

one located on the discount side of the range is considered a valid trading zone

for us.

After identifying this area, we simply wait for price to return into

the FVG

and then zoom into a lower timeframe to look for long trade opportunities.

When we move to the five-minute chart, we can see that price creates a change of

character by breaking above this level, which acts as our confirmation

and reversal

signal.

At this point, we identify a new fair value gap on the

five-minute

timeframe and place our buy order at the beginning of the zone.

Let's set our stop loss below it and target the next important zone in

front of the

price. Let's see how this trade plays out.

Next, on the CAD/JPY one-hour chart, we see a clear downtrend with multiple

fair value gaps. But after applying the retracement tool,

only one of

these zones is a valid supply according to our rules.

Once we mark our trading zone, we wait for price to retrace back into the

area

and then zoom into a lower timeframe to execute the trade according to our plan.

On the five-minute chart, price forms a change of character along

with a fair value

gap, giving us our entry setup. We place a sell order at the beginning of

the

FVG zone and set our stop loss above it.

As you can see, this trade ends up being a win.

However, loss is part of trading.

No matter how good your strategy is, losing trades are unavoidable, and

a loss does not mean that your analysis was wrong.

The most important thing is to clearly define your rules,

stick to them,

and follow proper risk management.

As long as you do that consistently, you will be fine in the long run.

So that's it for this video.

I hope it provided value to you.