Fair Value Gaps(FVG) are a popular Smart Money Concept(SMC). This strategy is primarily implemented by price action forex traders. Fair value gaps are essentially price imbalances with regard to buying and selling pressure. This strategy is focused on supply and demand.
Fair value gaps typically occur in a three candle formation. In a bull fair value gap, there is a gap between the low of the third candle and the high of the first candle. In a bearish fair value gap, there is a gap between the high of the third candle and the low of the first candle.
This gap represents an imbalance in price, and typically the gap with be filled in latter price moves. Fair value gaps can be observed on various time frame charts, From the daily and weekly time frame, all the way down to the 1 second chart. This price imbalance occurs on a variety of asset classes, not only forex, but on stocks, futures, and crypto currency as well.
Liquidity Grabs/Sweeps-
A Liquidity Sweep (AKA: Liquidity Grab), is another Smart Money Concept. Liquidity is the lifeblood of any market. Without liquidity, retail traders, large institutions, and investors alike wouldn’t be able to get their orders filled. Liquidity is even more important for institutional investors and traders because they are trying to get large blocks of orders filled. Many times an institution will structure their orders throughout the day or week in order to average out their price and not move the market to abruptly in any one direction, which could influence smaller retail investors and traders to take a position based off of the institutional order flow.
In its most basic terms, Liquidity sweeps or a liquidity grab, is an institutional strategy. Its essentially when the price of an asset breaches a support or resistance level, allowing the big money trader to take advantage of the higher liquidity offered in these zones. Since support and resistance levels are observed by most novice and advanced traders alike, these key levels provide zones of excess liquidity where institutions strategically place large blocks of orders, in order to get them filled at a more favorable price. The premise behind this strategy is that most traders often place their stop orders around support and resistance levels. when these levels are breached, the stop orders are triggered, its these stop orders that give the extra liquidity for an institutional trader to capitalize off of the breach, allowing them to fill larger blocks of orders at a more favorable price, and shoot the price in the other direction, resulting in a profitable trade.
The great thing for us little guys and gals, is that we can piggy back off of this Smart Money Concept and profit along side the big dogs as well.
Many traders that subscribe to the Smart Money Concept forex trading approach will utilize their knowledge of liquidity grabs in conjunction with fair value gaps, because these two concepts often go hand and hand. A trader might look for liquidity grabs on a 4 hour chart, while also trying to find fair value gaps on a lower time frame. Because typically these imbalances go hand and hand. The fair value gap is extra confluence that price may eventually retrace after the liquidity sweep is concluded.
