The ONLY Fair-Value-Gap-Video you will EVER need (Trading World Champion reveals)

Fair value gaps a big hype right now. Do you use it? I will give you a big explanation about the fair value gaps, but are they really that special? Let's take a closer look and understand why they are closed often and when they don't, we will look together. Did the fair value gap are using important for you or are there other things behind who are much more comfortable to trade with? Logic behind? I translated this video with AI because my English is not perfect, but I think you will love it because you got a very deep introducing at the fair value gaps. Thanks a lot.

Dear friends, today I want to talk with you about what fair value gaps are and what gaps in general actually are gaps. Well, those are price gaps at first. That's nothing special. Or is it? It's much more important to know when do these price gaps cause something to happen and what makes them get filled? Meaning when does the market move back to close them and when do they stay open? Because unfortunately a lot of people make this mistake. Retail traders think that pretty much every gap will eventually be closed and fair value gaps are a special case. In the end, they occur during a strong fast move in a quick accelerated trend. These are price areas where the market hasn't made any pullbacks and that's why we distinguish between fast trends and normal trends. And yes, there are also slow creeping trends. Three different types of trend structures for us. It's of course interesting to know why these gaps are usually filled. Again, why do the big market participants want to close such price gaps? The answer is very simple. There was no fair auction there between buyers and sellers. One side was completely dominant. And that's why market participants are very eager to check whether a fair business could still take place there after all. Furthermore, and this is what you need to understand if you know the mindset and structures of the global players, there may still be so called open auctions at these price levels. This means they still need to route certain assets there, in other words, to position them in the market. And then it gets interesting because usually there will be a reaction there. But the reaction is not a quick counter trading move. Instead a range forms there and that's exactly what you need to distinguish. When can you use such fair value gaps as counter trading ideas? When should you rather use them only as exit points and when should you expect ranges to form there? Three different scenarios and unfortunately it's very often presented as if you could just always use these fair value gap levels. But let's take a look at the chart and also find a few technical Derivations how the pros might look at the whole thing from a different perspective and see it much more simply. And it's exactly these other pieces of information that are contained within. So here you can see a chart. And this chart, I draw it in black, very thick, goes as follows. It just drops down quickly here and then makes a pullback in this price area here. The market never made a pullback from here upwards. And that's why we call this price area a fast trend. And the market profiler sees a single print area here, nothing more, nothing less. I also like to call such zones space. That simply means price areas where the market has left something open, left it standing in a normal trend like here. The market always comes back to certain price areas. Yes, I know here as well, briefly, such a price area. There's also a counter here that you could have theoretically taken, and so on and so forth. But structures like these are more underpinned by comfort trading. Not much has happened there. And then these extremes always come up. And when these extremes occur, and for example, the market makes a pullback up to here and continues to move upward, then we refer to this small price area from the last level as a fair value gap. You can simply look at it that way for yourself. You can always refer to the most recent highs and lows. And from that you can simply use your so called extremely accelerated price areas for yourself. Let's take a look at all of this on a chart. For example, here I want to walk through it a bit with you so you get an idea. Here, for example, the market dropped sharply and then formed a B, as you've already learned. And where is the so called fair value gap now? Where has the market not traded certain price areas multiple times? And you can see that here is the last low. And from the last low to the last pullback area, we have this price range. And lo and behold, you can clearly see here that it's only this volume. Just referring to this area here, there was a very low volume movement present there. Only very few traders generated volume there. You can always continue this process and then look at where there have already been pullbacks and where not. Here, for example, you can also see very clearly that the market has only ever revisited its prices up to here and here twice. And look at this. This is also where the market stopped for the time being. Yes, it always looks so nice, so neat. But I can tell you what's much more important is being able to make the decision how do I build a smart risk reward ratio for myself? From this. Because do I even know, for example, if I were to enter a short trade here, where my next target area is, and for that I have to think a bit further. And I can't just use this fair value gap as an entry trigger. I also need to know where is the probability high that the market will move back there. And for that, let's take a step back to our volume profile explanations. And remember, fair prices, unfair prices. The probability that a market will revisit an unfair price level is quite high. But first it will usually return to the next fair price area. Yes, but where is that? Is it here? Or is it here? Or is it these inside bars? Yes, these are the things you absolutely have to figure out. And now let's just assume that the point of control for all of this is somewhere here in the middle. What would you say? Maybe there's a possibility that it first tests the upper edge and then the point of control, thereby generating new acceptance. What am I trying to tell you with this? Not to say that fair value gaps are a bad thing. No, they can be very effective at times, but they're only effective if, for example, you would say the market moves up here in the following way. Let's draw it over here now and see, for example, the market goes up and moves up here and here. We're now looking for a counter trade to trade back down. So it's really important to know where is my next one take profit? Where is the next price area I can use in order to apply the simplest logic of all logics, which unfortunately many people don't follow. The risk is this big and the opportunity, let's say, is up to the next one target. Here it's this big. And then I have a risk reward ratio of, let's say about it's twice as big, two to one.

Yeah, but now I also need to know what is my hit rate? And just today I got feedback from someone who wrote to me. Hey, Tom, it's totally crazy. If you analyze the markets really smartly, you often get trades with a risk reward ratio of 5, 6, or even 7. So that's what really matters in trading in the end. Not wanting to be right, not programming those fair value gaps, and then just bluntly saying, now you can always do counter trading with this. Please forget that that doesn't work. That only works if you can always reliably read the context and truly know how far the market will actually go and what your real genuine hit rate is for the market actually reaching that particular point. So it's not just about researching whether the entry signal is cool, but also whether the market is actually doing what I planned beforehand and whether I've maybe set a good stop loss here so that I'm not taking on too much risk. Let's take today's FDX as an example. It created a very nice fair value gap here. This is where the move started. And here was the deepest pullback. So now let's assume the market shoots up like this and then comes back down like this. And here we find the opportunity to generate an entry. So what kind of structure do we have then and now what I mentioned right at the beginning of the video becomes very important. We have a fast trend, and we've also quickly retraced that fast trend. And now we're getting a setup here. Let's say we have our stop loss placed below here.

Whether you put it there or not depends on whether you use setups here that are very smart. We'll get to that in a moment.

And then to the upside. You can expect the market to establish new highs. Why? Because this trend here won't act as resistance. That is likely to stop the market.

But we can also look at the same picture from a different perspective.

So if the market suddenly turns into a.

Balance, a sideways phase up here, and then it slowly moves down, and I want to plan a trade entry here. So what's the situation then? Then all of a sudden, if I know how markets work, I only have one target left up here, and suddenly my risk reward ratio is only one to one. That means it's not just crucial that you define an entry zone here using a fair value gap. But what's much more important is what does the structure look like when the market allows your counter trade at the fair value gap, so that it actually gives you a good trade and nice profits, provided your hit rate for these structures is also appropriate. If we had a risk reward ratio of one to one, you would need at least 51% without order fees just to break even. Now, of course, there are people who say, but I have an 80% hit rate. That may well be true, but the question is whether they're always really being fair with their average risk reward ratio. And unfortunately, I very often don't see that in practice. Alright, let's establish a connection between such fair value gaps and market profiling theory. And then you'll realize, okay, you can actually do all of this much more simply. Here, for example, is an old single print area precisely at the price level of 23,660. So that means this is exactly where this fair value gap formed and established itself in this price range.

And now, of course, the question is, when we get there, does it make sense to place a trade here to go long.

Or does it make more sense if I'm already in a short trade, to use this price area just as an exit.

Which is probably the better probability? The honest answer is, of course we never really know, but the probability that the market will have a strong reaction here at first is very small. Why is it so small? Because if I know the rules of market profiling, then I know that this was simply an open drive here and the market just gave me a strong buying tail at this point. And that really won't offer any support for me. If, for example, the market has previously formed a new fair price range here, I will very likely get stopped out. And then it's much more important to understand where the next price levels are. For example, from the volume profile where a market is more likely to hold. Yes, they're here. Yes, for now, they're located at this value area. Whether the market will actually hold there or not, we'll see. But the probability is significantly higher. And that's why you get two pieces of information here, not just one. Where is a fair value gap? And now let's take this a step further and look at the whole thing from a 24 hour time frame perspective. As you know, there was a big gap here earlier. Now we've let the market run for 24 hours. So what's crucial now, there was never any trading here. So is this price area interesting for us or is it just boring because there probably won't be any support there?

These are questions you should also answer because they're really important. And now look over here and you'll see I'm talking exactly about this price area where in this picture the market during cash hours has no substantial support zone at all. It may pause there briefly, but it's not substantial. And that's why we go back to this beautiful one fair value gap. It's much more important to look at what kind of setup I get here. And if, for example, I get a breakout setup to the short side, then I can take it because it will trade through the entire zone. But where do I take it? And that's another crucial question that I'd like to answer for you. Now.

Look, first you can check what kind of setup you get there and what you expect based on the logic I just explained to you. So am I looking for a counter Setup, a breakout setup, of course, always when the market comes here. Or am I looking for something trend following once I've gotten confirmation. And now let's make the shift and take a look at it the way we like to do and not the other way around about these, let's say sometimes rather delusional assumptions that these setups should always work with these nice gap structures. Let's take a look at the whole thing from a dynamic perspective. Here we have a footprint chart. I've set it to five minutes now. And here we have this so called buying tail.

Here the market bought aggressively and if you take a look now, the opening of the day caused a lot of trading volume here. What do you think will happen if the market falls below the area where there was no more trading activity? It will simply drop down to the next price area where real volume took place. And that's definitely not somewhere here in the pre session. It might react briefly here, but the probability that it will break through is much higher, especially if we generate new fair prices here. And these fair prices would then, for example, be established in such a fair value price area. Please remember, yes, that was the one, the price area here up to about 655, 650 and yes, exactly in this price area you'll now get a completely different signal, but definitely no more counter trading for long positions. And that's why if you adapt this logic for yourself, you can time your risk reward ratio much better. Because if you go long here on a pullback, you know exactly that your stop loss doesn't belong here, but rather here. And suddenly your risk reward ratio is twice as good. And that's my stance on fair value gaps. I find them, let's say, useful if you think through the underlying logic a bit more deeply and if you can clearly define the relevant market participants for yourself in the previous trends. Because only then is it possible for you to establish a smart risk reward ratio for your trades. And it's not like you get gigantic hit rates with these fair value gap trading ideas. No, that's not the case. Yes, I hope this has given you a lot of insights about whether markets should mainly be viewed from a technical perspective or whether it's actually better to add.

Other tools to the mix which simply give you information that you can't read with a simple chart model where you just draw in the fair value gaps. Especially when you use setups where you want to define your stop losses. Footprint charts are a great tool to make the whole process much more targeted with regard to protecting your capital. Thank you all very much. And I'm already looking forward to sharing the next lesson with you where we'll show you more exciting topics. Thank you very much.