2022 ICT Mentorship Model Episode 6 (Notes)

Mastering Fair Value Gaps and Market Structure Shifts in Trading

Understanding Smart Money:


Smart money, comprising liquidity providers, aims to exploit retail traders’ lack of knowledge and consistency. Rather than relying on indicators or technical analysis, smart money focuses solely on liquidity. By embracing this mindset, we can align ourselves with the strategies employed by these successful traders.

Trading Against Retail Traders:


To emulate smart money, we adopt a contrarian approach. Instead of blindly following patterns or momentum indicators, we enter long positions when retail traders are selling and short positions when they are buying. By anticipating price movements driven by liquidity-seeking behavior, we gain a competitive edge in the market.

The Significance of Timing:


Timing is crucial in our trading strategy. We closely monitor specific moments in the day when liquidity shifts occur. For example, bearish fair value gaps materialize after a surge in buy-side liquidity. Recognizing the formation of a three-candle pattern, we patiently wait for the price to tap back into the fair value gap before executing a short trade.

Fair Value Gaps:


Similarly, bullish fair value gaps emerge after a surge in sell-side liquidity. By observing specific candle patterns, we identify opportune moments to enter long positions. The fair value gap acts as a catalyst for price movement, and we capitalize on this inefficiency to make profitable trades.

2022-ICT-Mentorship-Episode 6

Fair Value Gaps manifest as a three-candle sequence on price charts. They are visually characterized by a large candle surrounded by neighboring candles whose upper and lower wicks do not entirely overlap the large candle. This pattern indicates a temporary disruption in market equilibrium, drawing the attention of price action traders.

Market Structure Shifts:


Market structure shifts play a crucial role in our trading approach. In a bearish shift, the price establishes higher highs before swiftly plummeting below previous lows. We anticipate the formation of a fair value gap within this price range. Conversely, in a bullish shift, the price forms lower lows before making a vigorous upward move, closing above previous highs. Our aim is to identify and capitalize on these shifts by strategically entering trades.

Conclusion:


By mastering the art of fair value gaps and market structure shifts, traders can gain a competitive edge and move away from the common pitfalls faced by retail traders.

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