Fair Value Gap Secrets I Wish I Knew as a Beginner

0:00If you struggle with knowing which fair

0:01value gaps to trade and which ones to

0:03ignore, then this is the video for you

0:04because in this video,

0:06I'm sharing what fair value gaps are, why

0:08they form, why markets tend to revisit them,

0:10the four rules for finding the best ones,

0:12and also how to incorporate it in your

0:14trading to make you a more successful

0:15trader.

0:16So if you're new here, my name is Justin

0:17Bennett, Forex trader since 2007, full-time

0:20trader since 2011, and as always, all of

0:22this is for educational purposes only and

0:24not financial advice.

0:25So let's get right into it, and there is a

0:27lot of misinformation out there on fair

0:28value gaps, so I'm hoping that video clears

0:30everything up for you.

0:31So looking at this chart here on the EURUSD

0:33one-hour time frame,

0:34let's first talk about what a fair value

0:36gap is, then we'll get into the rules for

0:38trading them.

0:39So first and foremost, when we're looking

0:41at this chart, you can see that there are

0:43some gaps here.

0:43However, what I want to talk about is what

0:45happens next here on this chart.

0:46So this right here, this is the start of a

0:49fair value gap.

0:50So what this is, when we think about the

0:52term fair value gap, what it means is a gap

0:54in the fair value.

0:55So what is the fair value of a market? So

0:57you can see back here, we had consolidation

0:59from the euro.

1:00So the market went sideways through here.

1:01And this is what's considered a fair value.

1:04So when you get consolidation like this,

1:06especially for extended periods of time,

1:08this is fair value, what we also call

1:10equilibrium.

1:10So this is the fair value of a market where

1:12buyers and sellers

1:13are essentially agreeing on the value of

1:15the euro for this period of time.

1:17So when you think about a gap in the fair

1:19value, what that means

1:20is the market breaking out from the fair value.

1:23Okay.

1:24So it's a gap in the fair value.

1:25Now the gap that forms isn't necessarily

1:28just the move.

1:29It's the candlestick pattern.

1:30Now a fair value gap is a three candlestick

1:33pattern.

1:33So when we look at this chart here, the

1:35mistake that a lot of traders make is that

1:36at this point on the chart, they will look

1:38at this here at this high and say this is a

1:40fair value gap.

1:41Now this isn't technically an FEG because

1:43it's a three candlestick pattern.

1:45So you have to have the next candle close.

1:47So let's go ahead and move this forward

1:49here and take a look at what a fair value gap is.

1:51The best way to explain it

1:53is just to show you on the chart.

1:54So if we look at this now

1:56on this next candle, we have a confirmed

1:57fair value gap.

1:59So what you'll notice here is that off of

2:01this high,

2:02and remember this was within the fair

2:04value, okay, consolidation or equilibrium.

2:07So this high right here that formed, you

2:08had the next candle that closed here,

2:10the next one that closed here.

2:11So it's a three candlestick pattern.

2:13This is 1,

2:14this is 2 right here, and this up here is 3.

2:16Okay, the green candle right here.

2:17So once you had this candle formed, the

2:19next candle opens, you have a fair value

2:21gap right here off of this high. Okay.

2:23Okay, so that is a fair value gap.

2:25Very simple.

2:26But again, the mistake a lot of traders

2:27make is they look at this candle here while

2:29it's forming and think that this is a fair

2:31value gap, when in fact it's not.

2:33Because what could have happened here on

2:34this candle is the market could have just

2:35moved lower,

2:36tested this level. Okay.

2:37And then in that case, it is not a fair

2:39value gap.

2:40So you have to have that third candle close

2:42in order to have a confirmed FEG.

2:44So that's what a fair value gap is.

2:46Now, I want to address something here that

2:48I see a lot of misconception about is it an

2:50inefficiency or is it an imbalance? And

2:52when you think about fair value gap like

2:54this, the same thing for an order block or

2:55any other inefficiency in the market,

2:57a lot of traders will say, well, this is an

2:59inefficiency.

2:59Other traders will say, no, it's an

3:01imbalance.

3:01So what is it? And I want to clear

3:04this up once and for all because it is

3:06really very simple, but they're not two

3:08separate things. So

3:09It's not that an FVG is an inefficiency, an

3:11order block is an imbalance or anything

3:13like that.

3:13The difference between the two is not that

3:15they're

3:15this or that on the chart.

3:17They're essentially cause and effect.

3:19So what happens here is you have

3:21an imbalance between supply and demand.

3:23And now note, I did not say

3:25an imbalance in buyers and sellers because

3:27you technically cannot have

3:28more buyers than sellers or more sellers

3:30than buyers.

3:31You have to have equal numbers, right?

3:32That's the only way

3:34that orders can be filled.

3:35But when you get this kind of move right here,

3:37you have an imbalance between supply and

3:39demand.

3:40So there was more demand here

3:42than supply could handle.

3:43So that right there is an imbalance. Okay.

3:45It's an imbalance in supply and demand that

3:47creates an inefficiency.

3:49Okay.

3:50So it's a cause and effect relationship,

3:52not necessarily that this is

3:54an inefficiency or the block is an

3:56imbalance or vice versa. So

3:57it's cause and effect.

3:58You have the imbalance between supply and

4:00demand.

4:00and that creates the inefficiency back here.

4:03So I hope that clears it up once and for

4:05all, because I do see a lot of

4:06misinformation out there

4:07on the

4:08definitions of imbalances and

4:10inefficiencies in the market.

4:12Now let's talk about, before we get into

4:13the four rules here and run through some

4:14examples,

4:16let's talk too about why markets tend to

4:18revisit these areas.

4:19And that's really the key for today's

4:20video, because

4:21otherwise this really wouldn't serve you

4:22much good, except we know that the market

4:24does tend to revisit

4:25fair value gaps like this.

4:26And what you have to remember is that

4:28market makers have the job of facilitating

4:30orders.

4:31So they have the job of matching

4:33buyers with sellers and sellers with

4:34buyers.

4:35Now, in order to do that for a very large

4:37buyer or seller,

4:38they need liquidity, okay, and lots of it.

4:41So when you think about the market moving

4:42quickly away from areas like this,

4:44there are pending orders through here that

4:47did not fill.

4:48Okay, so if you're a market maker and you

4:50have a very large buyer or seller

4:52and you're trying to get them filled, you

4:54need liquidity, resting liquidity like this

4:56down here.

4:57So I often say that markets are liquidity

4:59seeking machines because they are.

5:00They're going to move to wherever

5:02the most liquidity is on the chart.

5:03And in this case, you had a lot of orders

5:05through here that did not get filled.

5:07So that's why you tend to see the market

5:08come back into areas like this before

5:10continuing in.

5:12current direction, which in this case is an

5:13uptrend.

5:14We have the change of character back here,

5:15which we'll talk about in a moment.

5:17But markets tend to come back to these

5:19areas because again, market makers have the job

5:21of facilitating orders.

5:22And if they have a large buyer or seller,

5:24then they need that liquidity in the

5:26market.

5:26So they have tactics to get the market

5:28moving back here into pockets of liquidity

5:31so that they can facilitate those orders.

5:33So that is the bottom line.

5:34The reason that FAG is filled is because of

5:36liquidity.

5:37That's why markets move

5:38between pockets of support and resistance

5:41all the time.

5:41It all comes back to liquidity.

5:43Okay, so looking at this hourly chart,

5:45let's run through this here.

5:46Let's talk about some rules for trading FEGs.

5:47And before we do that, I want to look at this

5:50trend here on the euro and run through some

5:53directional bias analysis here quickly.

5:55If you missed the last video on that,

5:57I encourage you to go check that out.

5:58I'll link to it in the top of this video.

6:00I explain breakup structure and change of

6:01character very simply in that video.

6:03So that is a must watch after this one.

6:05So looking here at the euro, we have a

6:07downtrend back here, lower highs and lower lows.

6:10So in order to really understand where we

6:11are now on the chart, what we have to do is

6:13come all the way back here,

6:14even before this change of character.

6:17And what you'll notice is that down here,

6:19this was the last break of structure.

6:21So notice how

6:22during this period down here,

6:24we never had the euro closing below this low.

6:27So we never closed below

6:28this low down here.

6:30Therefore, this is the last confirmed break

6:32of structure during this downtrend.

6:34So this is important because this is how we

6:36find the level that is going to represent

6:39our change of character.

6:40So from this area here, from this breakup

6:42structure, if we move back to the highest

6:44high within this current leg,

6:46in other words, what we're looking for here,

6:48and I know I'm getting into directional

6:50bias, but this is important for trading

6:52FEGs as well.

6:53When you look at this here, this is

6:54essentially

6:56our window.

6:56This is the leg that we're talking about.

6:58So we have the breakup structure down here.

7:00And what is the highest high within this leg?

7:03And that's clearly this one right over here.

7:06So if we snap a level right here toward

7:09this high,

7:09drag this across, that is our change of

7:12character.

7:12Bullish change of character right here.

7:13So as soon as we add the euro closing above this,

7:16it doesn't matter that we dip below it

7:18here, that does not matter.

7:19All that matters here is that we closed above.

7:21We got a candle closing above here on the

7:22hourly, that confirmed a change of

7:24character.

7:25So let's go ahead and map this out and

7:27we'll walk this forward and I'll show you

7:28guys exactly

7:29what I look for when trading FEGs.

7:31Okay, so

7:32this right here is going to be our break of

7:34structure.

7:34Again, we did not close below the low here.

7:36So this one up here is the last BOS.

7:38Okay, so we have a confirmed trend change

7:40here for the euro.

7:41That means that once this happens, I'm only

7:43looking for buys on pullbacks. So

7:45in this case, what the first rule is going

7:47to be is that it must be.

7:50with the trend.

7:50So that also accounts for change of

7:52characters because again, once you have

7:54this, you do have a new trend forming.

7:56So first rule, it must be with the trend.

7:58That's incredibly important because if

7:59you're trading against the trend,

8:01then you're already on the losing side and

8:02that's going to seriously hinder

8:04your chances of making money. Okay.

8:06So if you were given the option of rowing

8:08upstream or downstream,

8:09hopefully most of us would choose

8:11downstream because why would you want to

8:12swim upstream? It's the same exact way with

8:14trading.

8:15You always want to trade with the trend

8:16because that is the side

8:17that those big buyers in this case are on

8:19or back here

8:20during the downtrend, that's the side that

8:22big money was on selling this market. Okay.

8:24Now the second rule here is that if we look

8:26at this

8:27change of character, you can see that we

8:28did have multiple bars

8:29pulling back here,

8:30well over three candles pulling back.

8:32So what I would have done at this time here

8:34is mark out this high up here, right?

8:36Because we had a pullback down here into

8:38this area.

8:39We had the break.

8:39So this is now a new break of structure.

8:42So this is important too, because this is

8:44our second rule for trading FBG.

8:46So it must be with the trend.

8:48And it must also be before a break of

8:51structure or change of character.

8:52Okay, so we're going to say

8:54must trigger

8:55a

8:55BOS,

8:56okay, or

8:58change of character.

8:59And that's also important because

9:01otherwise.

9:02If you are trading FVGs that form without

9:05that break of structure or without the

9:07change of character,

9:08you are trading internal

9:10FVGs, okay? And that's not what we want.

9:12to trade

9:13after a break like this or after a

9:14breakdown like this if this trend

9:16continued, right? And I want to point

9:17something out here too.

9:18So in this case,

9:20And I remember this distinctly because I

9:21mentioned this to VIP members in Discord.

9:23At the time we had this change of

9:25character,

9:25what I was looking for back here from the

9:27euro, I was actually looking for a move

9:29back here into this pocket.

9:30And we never got it.

9:31So following this change of character here,

9:33I told members that I was looking for

9:35a buying opportunity down here in this area.

9:37Now, it didn't happen, okay? I didn't lose,

9:39obviously.

9:40But I also didn't get my entry.

9:41And I want to point this out because

9:43this stuff is not perfect.

9:44There is no perfect method out there in

9:45trading.

9:46Nothing is ever guaranteed.

9:48But this is something I was looking for

9:49down here in this area because we did have

9:51some FEGs that had formed here following

9:53the change of character.

9:54But we never got that down here in this area.

9:57Now, the second thing or the third thing

9:59here, the third rule for FEGs that I always

10:01look for

10:02is following this move here.

10:03Let's play this forward and see

10:04if this is in fact the swing high here.

10:07And you can see the market's moving higher.

10:09But once we start having the pullback, once

10:11we get a few candles pulling back,

10:12specifically at least three or so,

10:14right here, guys, what I'm looking for now, and

10:16actually I'm going to go back here toward

10:17this candle.

10:18So what I'm looking for once we start

10:20pulling back from the euro

10:22is I want to see the market pull back into

10:23discount.

10:24And this is incredibly important here

10:25because this is going to help you avoid a

10:27lot of FEGs that are going to get you into

10:29trouble.

10:29So for this, I have my Fibonacci tool

10:32designed in a way that I have every level

10:35removed except for the 50%.

10:36And I have these two shaded.

10:38So if you want to steal my settings, here

10:40they are.

10:40I'll pop this up here for a second.

10:43And basically really simple, zero line, one

10:45line, 50%

10:46line,

10:47and they're shaded in.

10:48So you can see this here on this settings.

10:50So looking right here, what I want to see

10:52from this market following the, again, we

10:54have the breakup structure, okay, we're

10:56with the trend.

10:57And what I want to see here, the third rule

10:59is that it must be below this 50% line. So

11:02in SMC terms, we're talking about discount

11:05because we're in an uptrend now following

11:07that change of character.

11:08I want to see the market pull back down

11:09here into this pocket.

11:11So this down here is your discount window.

11:13This up here is premium.

11:14Now, if we had been in a downtrend, so

11:16looking back here within this downtrend,

11:19what I would need to see if I Draw this out

11:21again from this high up here down here to

11:23the low, external high to external low.

11:25And again, I talked about that in the last

11:27video on directional bias if you missed that.

11:29But what I want to see here is I want to

11:30see the market come above this 50%.

11:32This is my pocket

11:34that I'm looking for.

11:35And I can narrow this down looking at FEGs,

11:37which we'll talk about next.

11:38But I want to see the market coming up here

11:40into premium before looking for a short.

11:42The rule is I cannot short

11:44down here in this case.

11:45Okay, so in the case of the current

11:47situation with the euro,

11:48we have the market, we have the change of

11:50character, we have the market moving

11:51higher.

11:51So I have to see

11:52this market move below the 50%

11:54down here into discount.

11:56I cannot trade anything up here. Even if

11:59a perfect FPG forms up here, I cannot trade this

12:02because we're still in premium.

12:03I want to see the market move down here at

12:04the discount.

12:05That is going to give me the best risk

12:07reward ratio.

12:07Okay, so what I'm going to do here is I'm

12:10going to draw a box

12:11below this area, and I do this too when the

12:13market's moving in real time.

12:15So we know right now that this is our

12:17premium window.

12:18So I'm going to remove this here just to

12:19keep it clean.

12:20And so this is our discount window

12:22down here.

12:22Now, from here,

12:24what I can do

12:25is I know, again, we're with the trend.

12:27Okay, we've had the break of structure.

12:28Those two rules are satisfied.

12:30And what I need now is the market to move

12:32down here into discount.

12:33So what I can do from here is I'm going to

12:35mark out this fair value gap because we

12:38know that this is a fair value gap down here.

12:39Okay, so I'm going to mark this out and I'm

12:41also going to mark out

12:42this one up here.

12:43So you'll notice

12:44that this candle right here, just below

12:47that break of structure, we also have not

12:48seen the market come down here in this area.

12:50This is a three candlestick pattern.

12:51This also qualifies as an FEG.

12:53We're going to mark both of these

12:55as FEGs.

12:57Now, what you can do from here, remember,

12:59this green box

13:00is our discount.

13:02This is our discount window within this

13:04current uptrend.

13:05Following the change of character, I'm

13:06going to relabel these just to keep it

13:07clear, because that is for the last time I

13:10marked it up for Discord members.

13:12Looking here at this here, we have one-hour

13:15FEG for both of these.

13:16So one-hour FEG

13:17on both of these highs.

13:19So remember, it's a three-candlestick

13:20pattern where the market moves away. This is

13:22our pocket that we're looking at.

13:23So what we can do now is take that discount

13:26window that we had before

13:27and narrow this down.

13:28And that's the entire goal here.

13:29So I know that this pocket now

13:31is within discount.

13:33And I also know that we have two fair value

13:35gaps right through here.

13:36So very clear.

13:38And the whole point of this, the whole goal

13:40with this

13:41is we're trying to narrow down the area of

13:43interest. Okay.

13:43That's what we call it.

13:45I know a lot of people out there say level

13:46of interest or point of interest.

13:47I like area of interest because that's

13:49exactly what it is.

13:50It's not necessarily a specific level.

13:52All right.

13:52So in this case,

13:53we have this area of interest down here.

13:55So this is a pretty tight window

13:56for us to now start looking for buying

13:58opportunities, which I don't want to get

14:00too far in the weeds on that in this video.

14:01I want to keep it really focused on FEGs.

14:03I will talk about, though, how to put all

14:05this together in future videos,

14:06including entry methods, which I will

14:08discuss a little bit later in the video, so

14:10be sure to stay tuned for that.

14:12But basically, we have this area down here

14:14of interest now that we're watching.

14:16So we have the uptrend, we have the

14:17breakout structure, we have the market

14:19moving into discount.

14:20So let's play this forward here and see

14:22what we get from

14:23the euro.

14:24So once we're down here in this area,

14:26I know that I can start watching the lower

14:27timeframes

14:28for a change of character.

14:30And the beauty of this, and again, I'm not

14:32going to get too far into this because I

14:33want to keep this video really focused on FEGs. I

14:36don't want to get too scattered here.

14:37But the beauty of this is that markets are

14:39fractal.

14:40And what that means is that you will find

14:42the same or similar patterns across

14:44multiple timeframes, across all timeframes,

14:46in fact.

14:47You could take a one-minute chart and a

14:48one-month chart,

14:49put them side-by-side, remove the label on

14:52them, show it to somebody and say, What

14:54timeframes are these? And they would have no idea

14:56because you could essentially find the

14:57exact same patterns on both timeframes.

14:59And so what you can do here is just like

15:02back here on the one hour timeframe,

15:03we were mapping out the breakup structure

15:05back here, change of character, break the

15:07structure,

15:07knowing that this market is now bullish,

15:09you can do the exact same thing on a five

15:11minute timeframe, a one minute timeframe.

15:13It doesn't matter because in this case,

15:14we have the area of interest now defined.

15:17Okay, so the mistake a lot of traders make

15:19is they start with the one minute or five

15:20minute timeframes, but they have no idea

15:22what's happening up here on the one hour

15:24timeframe or the daily timeframe,

15:26which I also cover with members and

15:28Discord. So

15:29they have no idea what's happening on the

15:30higher time frame, so they just drop

15:32straight to the five minute or one minute,

15:33and that's where they make the mistake.

15:35But in this case, we have our area of

15:36interest defined.

15:37We're then looking for that change of

15:38character here on those lower time frames. All

15:40right.

15:40But again, I don't want to talk about that

15:42too much in this video just because it

15:44starts getting scattered.

15:45But I know from looking at this chart here

15:47as well,

15:48like if I look at the 15 minute chart, for

15:49example,

15:50You can see that this pocket back here, and

15:52obviously this is in the past, so I know

15:54that the market's coming up here, but

15:55you can see right here that these two

15:57candles, guys, anytime you see this kind of

15:59gap right here,

16:00you know that the market is going to want

16:01to revisit that.

16:02Okay, so you can also use, and that's the

16:04point I want to make here too, that if we

16:06know the market likes to visit, revisit FVGs,

16:10within a trend, then it stands to reason

16:12that you could also use these

16:13as potential targets, and you can.

16:15And that's where a lot of traders I see on

16:18YouTube that stop short

16:19of using them as targets.

16:20They talk about how to use them as entries,

16:22but nobody really talks about targeting

16:24these areas as well,

16:25or at least not many do.

16:26And that's where you can have a real edge

16:28in these markets.

16:29For example, we know that this area back

16:31here was that fair value gap area on the

16:33one hour.

16:34You're then looking for a lower timeframe

16:35change of character through here,

16:37and then targets become obviously highs

16:39like this up here because now we're

16:40trending higher,

16:41but also areas, pockets like this back here.

16:44You have these FEGs as well that you could

16:46also use as targets for a market like this.

16:49So a lot of uses for FEGs, but you just

16:51really have to be careful of not trading

16:53ones that are internal because that's going

16:54to get you in a lot of trouble.

16:56So let's play this forward now on the

16:57one-hour timeframe

16:58and see what we get here from the euro.

17:00So you can see right there, we came up here

17:02into this pocket that I just showed you on the 15.

17:05So that right there, we filled that area,

17:07and now we're pulling back.

17:09Now, here is the fourth rule for FEGs.

17:12And this is really important as well.

17:13Just like order blocks, they are a one-time use.

17:17Now, in this case, you can see that if you

17:19had bought again, you would have made money.

17:21So we got the market moving sideways and

17:22then eventually moving higher.

17:24However, when you think about what an FEG

17:26is and why a market revisits it

17:28and why a market moves away from areas like this,

17:30you have to think about liquidity. And

17:32so like we talked about before, you get a lot of

17:34resting orders back here that did not

17:36trigger on the way up.

17:37And so it's a one-time use because once the

17:39market comes back here,

17:40you get those orders triggering.

17:41Traders are essentially induced into

17:43trading through here, right?

17:45And so this is a one-time use.

17:46So let's map out the third and fourth rule.

17:48So as we discussed,

17:50in an uptrend,

17:51okay, it must be in discount, and for a

17:54downtrend, it must be in premium.

17:57So that is our third rule, and our fourth

17:59rule here is going to be one-time use,

18:02okay, one-time use.

18:03So once it's mitigated, once it's tested,

18:05then it is no longer valid.

18:07All right, so let's play this forward now

18:08and see what we get here from the euro. Now,

18:11at the moment, you can see we did get a lot

18:12of internal highs and lows through here.

18:14So just to kind of clear this up, remember

18:16that our external low is this one right

18:18back here.

18:19So external low down here.

18:21This was the external high. Now,

18:23you don't map this out until you get this

18:26breakup structure.

18:27So you have the high back here.

18:29We know that this is the external low down here.

18:32because we now have a new BOS.

18:35So break the structure up here,

18:37that gives us this low down here.

18:38We know that this is the external low.

18:40Now, everything in between here is all

18:41internal.

18:42So let's take a look at this now and

18:44identify what we just talked about. So

18:45we're still with the trend, right? So these

18:47rules up here, if you look at this, must be

18:49with the trend.

18:49We've satisfied that.

18:50We're still with the trend.

18:51Must trigger a BOS or change of character.

18:54We have that here, right? BOS.

18:55Now, this one right here, okay, this is

18:57what we need to do now.

18:58So we need to figure out

18:59where is the discount within this leg.

19:02So again, because Because we know that this

19:03is the external low down here

19:05and this was the external high that we just

19:07broke above,

19:08what we can do here is we can start drawing

19:09out our fibs.

19:10Now, this could change because if you look

19:14up here at the high, we don't know at this point

19:16if this is going to be the high

19:18right up here or if we're just going to

19:19continue higher and then get the pullback.

19:21So this could change over time.

19:23But the point here is that we need to see

19:25the market come back here at least to the

19:2750%, ideally back here in this region.

19:29All right, so let's go and play this

19:30forward now and see if this is in fact the

19:32high within this leg.

19:34Okay, so moving forward, let's see what we

19:35get here from the euro.

19:36Now we start dropping lower,

19:38and that starts to kind of identify that

19:39that is going to be the high.

19:41Now let's look back here, and I'm gonna

19:43draw this out now again from the 50%

19:45down here toward the low.

19:46So this is our discount window.

19:48This is where we need to see the euro trade

19:50in order to start looking for a long

19:52opportunity.

19:53So looking back here at the hourly, you can

19:54see that we had

19:56an FEG up here.

19:57that filled.

19:58And this is, again, this is where the rules

20:00come in because what you'll notice here

20:01is that following this BOS, if you didn't

20:03have the rule

20:04to look for discount windows like this,

20:06then you would be looking at this high up here,

20:08this candle here, this FEG, and

20:10you'd be looking at this and saying, well,

20:12I want to buy through here.

20:13And unfortunately, if you were watching

20:15this here at the time and you were thinking that,

20:17then this right here, intraday, if you were

20:19looking at a one-minute chart, right, you

20:20could have had a change of character

20:21through there

20:22and you're looking to buy here and the

20:23market just continues lower.

20:24And this is why we have these rules set up.

20:26So the other FEG

20:27here that's really interesting as well.

20:30And this is why in a lot of cases, you'll

20:32see markets do this as well,

20:33where you can see the right off of these

20:34highs, you can see this low did not quite

20:37test it.

20:37Now that's literally like a less than a pip

20:39right there,

20:40but it still satisfies the rules of an FEG.

20:43Okay, so we can draw this out down here as

20:45a fair value gap.

20:46Okay, now

20:47here is the dilemma is that this one here

20:51is right at the 50%.

20:53Okay, so

20:54in this case, what we would do here,

20:56remember this one up here, this fair value

20:57gap we can't use because it's not in

20:59discount.

21:00But what you'll notice is that if we were

21:02looking at this in real time,

21:03right, because obviously hindsight is

21:05always 2020, but if you're looking at this

21:06in real time,

21:07you'd be looking at this high back here.

21:09And if you drop down to something like a

21:1115-minute timeframe and look back here,

21:13you've also got areas like this here as well.

21:15So this is a 15-minute FEG, and that

21:18gives you a

21:19window to look for

21:20a potential change of character to trade

21:22with the trend.

21:23Okay, so if we move this up here, now this

21:25is our window right here off of this high.

21:28Okay, so let's drag this over

21:29just to keep it nice and clean.

21:31So that is the area that we're watching

21:33here for the Euro.

21:34We're watching for a reaction from this area.

21:36So if we go back to our rules, again, we

21:38are with the trend.

21:40We have a recent break of structure.

21:41So we had a break of structure

21:43within this leg.

21:44And that's what's important here.

21:46So you have to have it.

21:47It doesn't have to occur immediately.

21:49You don't have to get the break of

21:50structure on the FEG,

21:51for instance, this one back here, but it

21:53has to be within this leg.

21:54It has to be within this leg here,

21:56triggering that break of structure or

21:58change of character.

21:58And in this case, it is.

22:00This pocket here, you can see started back

22:02here with the low.

22:03So again, from here, you're looking for a

22:05low timeframe change of character through here.

22:07I'm not going to get into

22:08it a bunch in this video, but that is

22:09essentially how I go through and mark these up.

22:11I look for

22:12the discount window within the current leg,

22:14we're with the trend, and then from there,

22:16I just refine.

22:17I look for those FEGs, one hour, 15 minute,

22:1930 minute

22:20to come up with a window.

22:21Now, typically,

22:22if you're trading something like the

22:23one-hour timeframe, you want these windows,

22:25they're typically going to be

22:26in the range of 10, maybe 15 pips.

22:29If you start getting ranges that are too

22:31broad, if you start getting ranges that are

22:3220, 30 pips,

22:34That's going to be problematic because even

22:36though you're looking for confirmation here

22:38on the lower time frames, like a change of

22:39character,

22:40it's going to be problematic because you're

22:41going to have such a wide window

22:43that let's just say in this case back here,

22:45this was your window that you had drawn.

22:47So from here,

22:49If you were looking at this kind of window,

22:51then if you were looking at the one minute

22:52timeframe, for example, back here, you

22:54could have had a change of character

22:55and that could have triggered you in and

22:57then you get stopped out. So

22:58you want a nice narrow window.

22:59Now you're not going to catch every move,

23:01you're not going to catch every setup, but

23:02in my opinion, it's better to have

23:04a nice narrow range of 10 or 15 pips that

23:06you're looking at here

23:08for a change of character just because it's

23:09going to give you the best odds of success.

23:12So let's move this forward now and see what

23:14happens.

23:14So was this the low? You can see we got

23:15another low right through here.

23:17And again, just to drop down here on the

23:19five-minute timeframe,

23:21right? What you're looking at here

23:22is you want to see the market take out a high.

23:25So you can see that we did take out

23:27this low back here on the five-minute close below.

23:29That makes this high up here the one to watch.

23:31This right here was a change of character.

23:33Okay, so bullish change of character there.

23:35And if we move this forward, let's see how

23:37this plays out.

23:38All right, so we have the market pulling

23:39back a little bit consolidation.

23:41consolidation, then we have that massive move.

23:43Okay, so you can see that played out really

23:44nicely.

23:45If you're looking for those low timeframe

23:47change of characters, once you have your

23:48area of interest identified,

23:50that is the best way, in my opinion, to get in.

23:52Okay, so now if we look at the current

23:54price action, you can see that we do have

23:55another break in structure here.

23:57So off of this high, let's move this over.

23:59We have a one hour close above.

24:00This is a BOS. Okay,

24:02so we have a trend continuation.

24:04Okay, so let's do this one more time

24:05because repetition is key here.

24:07That's really what's going to make you a

24:09successful trader is just repeating this stuff

24:11and over again in the practice you get.

24:12So repetition is everything.

24:14So looking here, breakup structure here, we

24:16have a very clean break.

24:17No question about that. Very

24:20decisive, impulsive move here from the euro.

24:22And if you'll notice, the

24:24FEG

24:25that I'm watching here following this break

24:27would have been back here, way back here in

24:28this area.

24:29So this was a three candlestick pattern.

24:31Obviously, we had a very explosive move out

24:33of this.

24:33And you can see back here, this is right in

24:35the middle of this range here,

24:37which is what I like to see.

24:38Typically, in most cases,

24:40If you look at this here,

24:41it's going to be within about 50% or below,

24:44and that comes into that discount window again.

24:46But if you'll notice here, if you look at

24:47the low here to the high,

24:49right back here within the middle,

24:51high to the low down here, you have the

24:53market moving within about 50%.

24:55So typically you want that 50% or lower.

24:58And again, that just circles back to that

24:59discount window that we're looking for.

25:01So in this case, I have an FEG back here.

25:03If I look at the, let's say, 15-minute time

25:05frame to identify more,

25:06you can see that all of these candles back

25:08here really serve as

25:09a

25:10fair value gap for the euro, an area to watch.

25:13So what I like to do, because again,

25:14there's no guarantee that we come back here

25:16and satisfy this exact one.

25:17So in this case, in real time, what I'd be

25:19looking for here is to map this out

25:22to, let's say, this high up here.

25:23So this is a fair value gap as well in the

25:2515 minute time frame.

25:26And that gives us a pretty decent, let's

25:28see the size of this and make sure that

25:29we're not too wide here.

25:31So we're about like 17, 18 pips, getting a

25:33little bit on the wide side, but I'm

25:34looking for this area down here. Now,

25:36one thing that can narrow this down for us,

25:38because remember, we have to be in

25:40discount.

25:40So once we have this break up here,

25:43we know that this low

25:45right back here is our new external low.

25:47This is what buyers have to hold on to.

25:49Okay, so if we move this forward and let's

25:51see if this is going to be the high for the euro,

25:53okay, so we can draw out those fibs.

25:55So let's see what we get here from the euro.

25:57We're still moving higher.

25:58So I'm not going to draw my fibs out just

26:00yet to find that discount window

26:02just because there's really no point at

26:04this at this stage because I want to make

26:05sure that whatever high we have.

26:07is going to be the external high for the euro.

26:09And once we have this pullback here,

26:11right, this is enough for me to start

26:12drawing this area

26:14and looking for our discount window.

26:16So again, this was the low back here.

26:18This is our external low following the

26:19break of structure.

26:20If I drag from that low down here up to

26:22this recent high,

26:23you can see that this right here is our 50%.

26:26So what I'm going to do, same thing again.

26:28I'm going to draw a box from this area up here,

26:31down here to that inception point, and this

26:33is going to be

26:35my discount window.

26:36So this means that I cannot trade

26:39up here.

26:39I cannot look for buys up here in this area.

26:41Okay.

26:42So we have to see the euro come back here

26:43into this region

26:44before I can even think about buying.

26:46So let's play this forward now and I'm

26:48going to get rid of the

26:49fibs just to keep things clean.

26:51So this is our area of interest.

26:53Now in this case, remember those two areas,

26:54those two levels that we had drawn here,

26:56both are within

26:57the discount window. Okay.

26:58So technically this qualifies.

27:00However, in this case, what I would like to

27:02see, I would like to see the market come

27:04lower down here toward this level.

27:06The lower, the better.

27:07And again, we have to wait for confirmation

27:08on the low timeframe. So

27:10this is never a case where we are just

27:11looking to blindly buy

27:13from areas like this.

27:14Obviously, in hindsight, you can see if you

27:15had done that, you would've made money,

27:17but that's not the goal here because we

27:18don't know if the market is gonna hold onto

27:20areas like this.

27:21That's why waiting for those low timeframe

27:23change of character is so important.

27:25So looking here, what I'm looking for down

27:27here in this region is, again, another

27:28change of character.

27:29Let's go ahead and see what we get.

27:30Now I'm going to remove these two just to

27:32keep things nice and clean for

27:33us. So

27:34let's move this forward and see what we get

27:36here from the euro.

27:38So we're still moving higher, just kind of

27:39consolidating here.

27:40This high is still intact, so I know that

27:42the discount window I drew before

27:44is still valid.

27:45So let's watch here

27:46as the euro comes down here.

27:48Okay, now we're in that pocket.

27:49So at this point, again, you're looking for

27:51the low timeframe change of character.

27:53And I'm actually going to stop it right there.

27:54In fact, I'm going to go back here toward

27:56this area because I want to point something out.

27:58So once we come back here, if you drop to

28:00let's say a 15 minute or a 5 minute time

28:02frame, you can see right here that we did

28:04technically...

28:05Technically have on the five-minute

28:07timeframe,

28:08a breakup structure here, and then we had a

28:10change of character.

28:11Now, we are in the window here,

28:13and so technically,

28:15you could have been looking to trade this

28:17on the pullback.

28:17So breakup structure over here, change of

28:19character over here.

28:21Now, you had the change of character.

28:22At this point, you're looking for a

28:23pullback down here into these FEGs.

28:26Now, this could have been technically a

28:27long, and this is full transparency, guys.

28:29There are no guarantees out there in any

28:31market or with any method of trading or

28:33strategy.

28:34Now, going back to the hourly timeframe,

28:35let's see how this plays

28:37out.

28:39The other thing I will say, though, is this

28:41is where timeframe really comes into play,

28:43because

28:44if you're looking at a one minute or five

28:46minute, you're going to have a lot more noise.

28:47And so that stopout that we just looked at,

28:49you could have avoided that if you were

28:50looking at the 15 minutes.

28:51So let's say you use the one hour timeframe

28:53or four hour timeframe for directional

28:54bias, and

28:55then you use the 15 minute for the change

28:57of character.

28:58In that case,

28:59You would have not entered this because if

29:00you look here

29:01at these lows, we never closed below this

29:04low over here. Okay.

29:04So we never had

29:06a break of structure back here right from

29:08the Euro.

29:09And that meant that this was the high up

29:10here buyers had to take out and we never

29:12got that. Okay.

29:13So we never got that.

29:14Just lower lows and lower highs here.

29:16Now playing this forward, you can see where

29:17we did get

29:18a break right over here. Okay.

29:20So a break of structure.

29:22from

29:22the euro.

29:23So if we map this out to a breakup

29:25structure, you can see

29:26that this is now the high up here.

29:28So this one up here

29:29is the one that buyers have to take out.

29:32So breakup structure, this is the high that

29:34buyers have to take out.

29:35We're in this pocket still,

29:36and we're technically above these lows,

29:38which are technically internal lows as well.

29:39Remember,

29:40this is the low back here that has to hold

29:42now within this uptrend.

29:44So this is our external low

29:45right back here.

29:46And one thing I do want to note too is that

29:48when you get a market,

29:50so looking here at the hourly timeframe,

29:52When you get a market that comes all the

29:53way back here toward your area,

29:55and you just get the market chopping around

29:57areas like this, even though these are

29:59internal lows,

30:00you can see clearly that we have

30:02a shift here from the euro, or at least the

30:04start of one.

30:04Because when you get a market that does this,

30:07and this is your pattern,

30:08and then you get the market just doing this,

30:11you've got to be really careful because now

30:13we have

30:14the market behaving in a different way than

30:16it was the past two times.

30:18So that's kind of your first red flag here

30:20from the euro, but let's play this out on

30:22the 15-minute timeframe and see if we ever

30:24would have gotten tagged in here on the 15.

30:26Okay, so you can see that we're still

30:27moving around,

30:28still moving around, consolidating, come

30:30back there, test the lows,

30:31still just consolidation, really nothing to

30:33do here, still nothing to do, going

30:35sideways.

30:36You can see, and again, this is what I mean by

30:37the market is behaving different.

30:39We're not getting that explosive move off

30:41of the lows like we had the past two times.

30:43And right there, we do have a new break of

30:45structure, so that makes this up here the high.

30:48And right there, we are below

30:49the window.

30:50We're below our area of interest.

30:52And that right there is reason enough for,

30:56at the time, I would no longer be looking

30:58for buys.

30:58Because, again, you just have to look at

31:00this from a logical standpoint.

31:02If you get a market that is doing this

31:03within an uptrend,

31:04and then all of a sudden, you get the

31:06market just pulling back.

31:07lower high, lower low, and not behaving the

31:09same way.

31:10That is something worth paying attention to.

31:12So in this case, to recap, what you could

31:15have seen is that on the five-minute

31:16timeframe, if you were looking at that

31:17through here,

31:18that would have been a loss.

31:19Now, if you were on the 15-minute

31:20timeframe, you never would have gotten

31:22tagged into this as a buy, so you never

31:24would have traded this.

31:25But with that said, though,

31:26both of these back here on the five-minute

31:28were longs.

31:29And with that, if you were trading back

31:31here, and again, I'll get into this in

31:33detail in future videos, but these would

31:35have been at least three hour trades, if

31:36not five hour trades, targeting the highs.

31:39So if you had two back-to-back three hour

31:41trades and then you had a one hour loss.

31:42Obviously you're up on this leg if you were

31:45trading this. Okay.

31:45I just want to point that out because

31:47obviously no strategy is perfect.

31:48You are going to have losses in there,

31:50but that's also why risk reward comes into

31:52play with stuff like this, which I'll get

31:53into in future videos as well.

31:55But I hope that this has opened your eyes

31:56to fair value gaps, which ones to pay

31:58attention to, which ones to ignore,

31:59because if you follow these four rules, I

32:01promise you that is going to help your

32:03trading immensely.

32:04And if you've gotten this far in this

32:05video, I'm going to assume that you're

32:06serious about trading.

32:07And if you're serious, be sure to check out

32:08this video

32:09on how to confirm market structure using

32:11breakup structure and change of character.

32:13So thanks for watching.

32:14If you found this helpful, be sure to

32:15subscribe to the channel and trade well out

32:17there and I'll talk to you in the next video.