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The ONLY Fair Value Gap Video You’ll Ever Need — Transcript · YTtoTranscript

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The ONLY Fair Value Gap Video You’ll Ever Need

Lewis Kelly · 3,528 words · 18 min read · EN

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Below is the complete, readable transcript of The ONLY Fair Value Gap Video You’ll Ever Need by Lewis Kelly on YouTube. Read the full text, copy any part you need, or generate a transcript for any video with our free tool.

The fair value gap is one of the most powerful trading concepts in all of trading and yet it's also one of the easiest to get wrong. I see so many traders try to master the fair value gap [music] and yet most of them fail. Now, as someone who has gathered over 5 years

of data trading the fair value gap, over a thousand trades [music] executed, this video is broken down into three main parts. In part one, I will reveal what a fair value gap actually is on an institutional level in a way that you've most likely never heard of it before. In part two, I will reveal to

you the three rules that will help you identify winning fair value gaps time and time again. And finally, in part three, I'll take everything we've learned together and apply it to a step-by-step trade breakdown following a very simple to understand trading strategy. Starting with part one, what actually is the fair value gap? You see,

99% of traders who try to trade smart money concepts actually fail. And smart money concepts traders are literally being laughed at and actually called dumb money traders. And so, the thing that separates the 1% from everybody else who fails is understanding real context. You see, smart money concepts is just institutional level concepts

rewarded, repackaged for [music] retail. The problem, however, is that retail traders just think that it's pattern recognition. The real traders [music] understand context, a narrative. That's what I want to explain to you in this video. So, a market is always trying to trade at fair value. What is fair value? Simply put, fair value or efficient

pricing is an area of price where lots of trades can be executed. So if we look on the chart right here, you can see that this is the New York session here, Friday the 24th of October. This is the start of New York session on Euro dollar. You notice here that we have a

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kind of rangebound price delivery before a very aggressive move towards the upside. Well, this rangebound price delivery is what would be considered as efficient or fair value pricing. What we can see is a lot of transactions get traded at this level. How do we know that? Well, we can just simply use the

volume profile. So, we want to get the volume that was traded from the beginning of this New York session to up until where we are right now, which is 8:45. Now you'll notice here on the right hand side we have the total volume traded at each price level. So you can see the bulk of the volume is traded

right here which congregates to this area in here. So what many people fail to understand is that a lot of the times most of the liquidity most of the trading volume is happening in the ranges of price and then notice we have this huge aggressive move towards the upside when we have CPI data come out.

But notice something interesting that when this move starts taking off to the height of the level, notice that we have this huge gap in volume. Simply put, there was so little volume traded at this level compared to such a small range here. And yet price exploded towards the buy side. And then you can

see that volume comes back into the market after this move has occurred. And then we start trading at this level. Now what is actually going on here? This is real inefficient pricing. So there's two ways to break this down. The first and most important thing that you must understand is that a fair value gap or

commonly known in the institutional world as a market inefficiency is essentially an area of price where there is extremely low volume but we still have a movement towards the upside. What that means is that the aggressive buyers at this price point here has controlled price so aggressively toward the buy side and simply put there wasn't many

passive sellers in this price point. So essentially very very few market participants specifically sellers at this price leg. Therefore a very small amount of volume was able to drastically change the current value of this market. Now a deeper detail for this specific fair value gap is that this was created from CPI. So what actually happens when

you have these high impact news events is that market makers are able to legally pull their liquidity from the market. Now a very brief overview of what a market maker is. A market maker is somebody in the order book who provides liquidity on both the buy and sell side pretty much at most price

levels so that other traders can get filled on their transactions. And then this market maker is rewarded by taking the spread. That's how market makers make money. Now a market maker for example is a citadel. Citadel actually makes most markets. It actually has a very high total volume of the overall market making. It's one of its largest

kind of arms of its business. So those market makers are able to come out of the market at that price point and remove their liquidity from the order book. When that liquidity gets removed from the order book, it makes it very easy for a small amount of aggressive buyers at that time to push price higher

and very fast because there is so few passive sellers at that price point. And that's the way an order book works. Now, what happens after that fact is that there is this gap, right? And from a technical standpoint and how most people view a fair value gap or an inefficiency is with a three candle formation. So

what you want to see is you want to see a an aggressive candle is usually the first one and a kind of explosive candle but it's a three candle formation. So we have candle number one in here and then we have candle number two up here right and then we have candle number

three which is here. So if I remove this gap for a second those are our three candles. Now what you will do is you will take in a bullish example the high of candle one and the low of candle three. Notice that they do not touch. This third candle in here and this first

candle in here do not meet. That is essentially the potential for inefficient pricing or what you could call a fair value gap. So you would simply mark the first candle high and the third candle low and that area right there would be your fair value gap. And to confirm that level, simply just

understand the total volume that was traded at this level and you will see that there is a huge gap essentially in the overall volume. That gap is inefficient pricing. Now the theory is is that price will want to trade back into this price leg at some point to essentially offer price or reoffer price

at this price leg because again price has skipped a beat. So imagine if you are a buyer or a seller in the market and you actually wanted to buy or sell at this level. You just wasn't actually available at that time or maybe your orders actually didn't get triggered because there were so few other orders

in the order book. Let's say you were a passive buyer but there was no sellside liquidity. So essentially what happens a lot of the time is there's a lot of traders that were not filled at these prices that may may have wanted to get filled at those prices. So a lot of the

times price will regravitate back toward this level and a lot of the times close at least half or sometimes even the whole gap of price which is essentially price just reoffering at that price seeen as though many traders were not able to transact at that level. There were so few trades transacted at that

level the market wants to reoffer price at that level. Very very simple. So that's why a lot of the times you'll see these these gaps, right? And you want to validate them with understanding what the actual volume at that price level is. That is a fair value gap. Now into part two, I'm going to reveal to you how

to actually understand when to trade fair value gaps and what fair value gap to trade. As we look at the market here, I'll be honest, we can see that there are literally hundreds of fair value gaps that occur on any kind of one given daily basis depending on what time frame you're looking at. Now, why is it then

that so few of them actually hold? I mean, if we just literally look at this market right now, you will see so many fair value gaps and you'll see some hold and some not hold. The thing is is there are distinct tells of whether a fair value gap is really a fair value gap

that price will hold and that's what I want to break down to you right now. So essentially we just spoke about this fair value gap that was created from CPI on Friday the 24th of October right which is a couple of days ago as of recording this. Now notice that we have this fair value gap and actually me and

my live trading members we actually took some short positions from up in this high right here. I'll actually put the screenshot in. Every New York session, I trade live with my inner circle members. If that's something that you think will help your trading or something that you're interested in, then down below, you can fill the form and apply to live

trade with me every single day. So, yeah, some of us took these trades from here, literally just trading back into this fair value gap because we knew that the likelihood is is that gap is going to get filled. Now, notice when I come into the market today, right, Monday the 27th of October, this is how the session

looks. This is how price actually looks, right? We have yesterday, we have the Friday's price leg, we come into the end of Friday, we have this range. Notice as well, right, that this range here makes up the majority of the total volume, right? So, don't be confused. Ranges don't equal low volume and big moves

equal high volume. That's not necessarily true. So, we have this right here. Now, there's a couple telltale signs of how I was able to catch this trade this morning that still hasn't fully completed, but I'll break it down anyway. So, we want to identify the best fair value gap to trade. Now, notice

here that we had this fair value gap and notice that the majority of that fair value gap has been filled. Now, most traders, if they didn't have the volume profile, would actually think that this fair value gap is essentially just now finished, right? It's useless. But if you look carefully, you'll see that this

candle right here, the first candle that initiated this move, still hasn't been traded into yet. And so from the lowest point that we come, which is literally right here, you can see that there's still actually a fair value gap here. And if you slide this fair value gap across, notice what we have on the

overall volume. We have a very low volume area, which is essentially a market inefficiency. And so if we just look at this overall area, we mark out a fair value gap and we have this inefficiency. This is the first sign of a good fair value gap. Right? The second sign of a good fair value gap is the

overall trend of price. This is the most important and honestly most simple. If we look at the directional kind of bias of this market, we are very clearly bullish, right? We were in this downtrend. and we're putting in lower lows, lower highs, lower lows, lower highs, lower lows. And then eventually, this is my kind of swing high. We take

out this high and we become bullish, right? So, we're actually bullish coming into today. That's the most important thing. You have to understand what's the likelihood of price trading higher or lower in this one session. And the key telltale sign of what that is is going to be your market structure. So the

second key after identifying the actual validated fair value gap from the volume inefficiency is the overall trend of price. You have to trade in alignment with the overall direction of price. Point blank period. It's a complete non-negotiable. You will be surprised at how many people try to short when the market is bullish. And it's very evident

like if you look at the fair value gaps that come to the left when we're trending bullish, right? You can see in here we have all of these bearish fair value gaps that are getting formed at these price points and eventually all of them get traded through because fair value gaps are great but they have to be

traded in alignment with understanding the overall context of price. So when I'm coming into the market today the first thing honestly that I'm looking for is low to high bullish. Okay, second thing point of interest which is my fair value gap in here which I've just explained to you. Now another thing and

a very important thing is liquidity right? So notice here that on these lows we have equal lows down here we have an old low down here. Now these equal lows this old low here represents to me liquidity. We have Asia low as well. So for me all the time I need to see a

liquidation of price. What I like to see is I like to see liquidity get built at a certain price leg and then sweep that liquidity into my point of interest. So, I like to see price sweep into a point of interest. That's the third thing. And the second part of the third thing is

liquidity to target, right? Liquidity to take, liquidity to target. You've heard me say it before. Liquidity to take down here on the sell side. Liquidity to target is the high of the previous week. It's the high of the previous day. It's the high of the Friday session. It's the high of New York session. And we have

Asia high here creating an relative equal high across here. So this is a very very obvious point that price will want to revisit. And so this trade setup becomes literally super simple to me. Now if I didn't have these, right, if I just had a fair value gap or just a fair value gap, I wouldn't know which way to

go. Right? There's fair value gaps in here. Should I trade those? Should I trade these fair value gaps? What about these ones? Right? Just understanding a fair value gap and seeing them in the market isn't enough. You have to have context. And so for me, the context is the direction of price, right? Bullish

is the the low volume in here, the context of what this move represents, the liquidity that we're going to take out on the way, and the liquidity that we're going to target. So trend verification of a fair value gap plus the top level in here. that makes an actual good fair value gap. And so now

moving into the final part, how does this all come together into an actual tradable setup? How do I go from identifying this to actually executing a trade? That's what I'm going to show you right now. So for now, we're going to remove this volume profile because we can clearly see where it is. In fact,

we'll wait for price to come into this level. So you can see what do most people do, right? Most people are looking at this when London session opens and they're seeing this volume come up and they're seeing these equal lows or this double bottom or this support level across here and they're trying to buy this straight away. For

me, I'm seeing this as inducement. This is pushing price up going to make people want to look to go long, right? and then the real move is going to happen and then everyone's going to shift and then the real move is going to happen because institutions need liquidity to process orders. It's that simple. So that's

essentially what's occurring. So I'm patiently waiting for this right now what we can see. Look at that. Right? We sweep these lows literally perfectly into this fair value gap. We have now come into this kind of low volume area. added a little bit of volume to it and we're immediately having an aggressive

reaction here on the 15 minute. But that's not enough. I need confirmation. So I gonna drop to the five minute time frame, right? And here on the fivem minute time frame, if we again remove this for now on the fivem minute time frame, notice that we have this, you know, structural high in here. So as

we're coming in, we're kind of coming in bearish and we have this structural high. Again, what this means is that right now sellers are dominating this market. That's why price is trading lower. So I need to see the realtime order flow shift from sellers in control to buyers in control. And that starts

with the shift of this high. So notice now that we have actually shifted this high, right? We have broken above this high. And if you just simply apply the volume again, so the fixed volume profile, right? And if you look at the volume, let's say from yeah, from here, what do you notice? Right? And if we go

to the 15-minut time frame, let's say, right, we have the volume in here, right? What do we notice? We notice that at this moment in time, the low volume is down here. So on the fivem minute time frame, that's where I'm first looking at trading. I'm first looking at trading this fair value gap that takes

place here. that's perfectly aligned with this area of low volume. Right? Then what happens? Price starts to aggressively shift. Now notice that there's a lot of volume in here, low volume in here, more volume in here. So now the area can be expanded. I don't need to just look at this level because the low volume area is in this

entire area. So if we go to let's say a 15-minut time frame and keeping a monitor on this on the chart again notice what we have here right we have the verified fair value gap in the terms of how it looks on a chart and we have this low volume area of price right

which literally starts from here and finishes here. So now what I can do is I can place this order long position on this fair value gap. You look at this and you you identify this as a fair value gap. And where do I place my stop loss? A lot of people might place their stop losses

down here. Me, I'm looking at the volume. I'm looking at these lows across here. The volume stops here. The volume becomes large here. So, I can technically just put my stop loss on the volume in here. And where am I looking to target? I can simply just target whatever. I can target a one to two

riskreward or I can look at targeting the swing highs up in here. And that's pretty much it, right? You want to see number one directional bias, number two, liquidity to take, clean fair value gap that makes objective sense from a volume perspective, clean liquidity or intended intentional target, nothing random. And what happens?

Price sweeps into the fair value gap, starts moving forward. And again, this trade is now still open. But understand that the overall target for me is here. Now, I might not hit this trade. This may be a trade that doesn't get hit. Maybe it is a trade that gets hit. Maybe you'll find out.

But regardless of this, this is the setup. And then it's about how many times does this setup work out. And so that is in essence how to truly understand fair value gaps in a way you've probably never been explained this before. And if you want to join me live every single day trading New York

session, then again check the link in the description.