Inversion Fair Value Gaps (IFVG) - ICT Concepts

Inversions and Fair Value Gaps Explained

Understanding Fair Value Gaps

• A fair value gap is defined as a three-candlestick pattern where the first candle's low does not overlap with the third candle's high, or vice versa. This concept is crucial for understanding inversions.

What is an Inversion?

• An inversion occurs when a fair value gap, specifically a bearish fair value gap (CBI), gets closed over or disrespected by subsequent price action. This indicates potential market movement.

• The next candle closing above this bearish fair value gap creates an inversion, suggesting that price may retrace into this zone or continue moving higher.

Consequent Encroachment

• Consequent encroachment refers to 50% of a fair value gap, which can be identified using Fibonacci retracement levels from the high to the low of the gap. Respecting this area can indicate further upward movement in price.

• If price violates this consequent encroachment area, it may signal a downward trend instead. An example shows how closing below the fair value gap leads to an inversion and potential lower prices.

Practical Examples on Charts

• On the Euro USD 60-minute chart, observing a bullish fair value gap helps identify when price closes below it, indicating potential sell-off opportunities towards previous lows. Entry strategies include market selling or waiting for retests of inversions with appropriate stop placements.

• After taking buy stops above old highs and closing back inside the range, traders should look for narratives that suggest trading lower towards sell-side liquidity based on previous patterns observed in external and internal liquidity contexts.

Further Analysis on Price Movements

• Following consolidation after sweeping sell stops, if new lows are created alongside another fair value gap being formed, closing over this new gap signifies another inversion opportunity for traders looking to enter positions targeting higher ranges while managing risk effectively through stop placements at strategic points like prior lows.

• The analysis continues with observations of aggressive moves down followed by attempts to move up; however, failure to close outside established ranges suggests waiting for manipulation before entering trades based on external range liquidity targets such as specific highs or lows within those ranges.

Understanding Market Structure and Fair Value Gaps

Inversion and Order Blocks

• The discussion begins with the concept of inversion in market structure, emphasizing how price respects order blocks before making new highs. This highlights the importance of recognizing these patterns for trading decisions.

Trend Analysis Using Inversions

• The speaker explains how to identify trends by observing higher highs and higher lows, particularly focusing on order blocks that indicate potential retracement points. This is crucial for traders looking to enter a trend at optimal levels.

Fair Value Gaps as Entry Points

• A fair value gap (FVG) is created when price retraces to a propulsion block, providing an opportunity for entry into the prevailing trend. Recognizing these gaps can enhance trading strategies significantly.

Anticipating Higher Lows

• After establishing a new high, the need for a higher low is discussed, with emphasis on using fair value gaps as indicators for potential price movements. This insight aids in predicting future market behavior effectively.

Utilizing Old Fair Value Gaps

• The speaker transitions to discussing old fair value gaps from previous market phases, explaining their role in supporting price movements during reaccumulation or redistribution phases. This understanding can help traders make informed decisions based on historical data.

Smart Money Reversal Confirmation

• A smart money reversal is confirmed through specific closing patterns above key levels, indicating potential bullish movement. Traders are encouraged to look for short-term lows following such confirmations to optimize their entries into trades.

Practical Example: Gold Daily Chart

• An example using the gold daily chart illustrates how old fair value gaps can be utilized as support after confirming a smart money reversal, reinforcing the practical application of theoretical concepts discussed earlier in the session.

This structured approach provides clarity on complex trading concepts while linking directly back to specific timestamps for further exploration of each topic discussed in detail within the transcript.