Liquidity + Fair Value Gap = Profit

Liquidity + Fair Value Gap = Profit

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Key Finance Concepts Covered

1. Liquidity in Markets

• Liquidity refers to resting orders in the market such as stop losses and limit orders.
• Large institutions move price toward clusters of resting orders (liquidity pools) to enter or exit trades.
• Session liquidity is defined by the high and low price ranges of major trading sessions:
  • Asian session: 8:00 p.m. – 12:00 a.m. Eastern Time
  • London session: 2:00 a.m. – 5:00 a.m. Eastern Time
  • New York session: 8:00 a.m. – 12:00 p.m. Eastern Time (equity markets open at 9:30 a.m. ET)
• Price moves predictably from one session’s liquidity pool to the next.
• Retail traders often place stops near session highs/lows, which smart money targets to accumulate positions.
• Institutional traders aim to be counterparties to losing retail traders by trading against stop losses.

2. Fair Value Gaps (FVG)

• FVGs are price inefficiencies created when price moves too aggressively, leaving untraded “gaps.”
• Identified as a 3-candle pattern where candle wicks do not overlap, signaling rapid price expansion.
• Bullish FVG: High of candle 1 does not overlap low of candle 3 → price likely retraces into gap before continuing higher.
• Bearish FVG: Low of candle 1 does not overlap high of candle 3 → price likely retraces into gap before continuing lower.
• These gaps represent areas where liquidity is “imbalanced” and price tends to return to rebalance.

3. Importance of Context

• Liquidity pools and FVGs are everywhere, but price respects them only when aligned with institutional intent for the session/day.
• Context involves understanding:
  • Where price is in the larger timeframe (premium/discount, near highs/lows, consolidation vs expansion).
  • Which liquidity is being targeted (previous session/day/week highs/lows).
  • Which session is driving the move (Asia building liquidity, London manipulating, New York expanding).
• Trading setups must align with this broader context to be effective.
• Example: In a bullish higher timeframe environment (e.g., NASDAQ, Euro, Gold), look for manipulation on lows to go long, not manipulation on highs to short.

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Three-Step Trading Framework (Applied to Index Markets)

1. Establish Context and Directional Bias

   • Use higher timeframe analysis to decide bullish or bearish bias.
   • Mark key session ranges (Asian, London) and previous day/week highs and lows.

2. Wait for a Session Liquidity Raid and Closure

   • A “raid” is price taking out a session high or low to trigger stops.
   • Do NOT enter immediately on the raid; wait for price to close back into the range or beyond a key level to confirm the move.

3. Execute Using Fair Value Gap

   • Enter limit orders within the identified FVG after confirmation.
   • Place stop loss below/above candle 1 or candle 2 of the FVG pattern.
   • Target opposing session liquidity levels (e.g., Asian range high if buying near Asian range low).

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Key Examples & Performance Metrics

• Reward-to-risk ratios typically range from 2.5:1 up to 6:1 in examples.
• Entry and exits are based on session liquidity levels and FVGs.
• Trades are taken only after 9:30 a.m. ET for index markets (equity open), avoiding trading outside this window.
• Patience is emphasized: do not chase price; set pending limit orders in FVGs and wait for fills.

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Instruments & Markets Mentioned

• Index markets (implied: NASDAQ, S&P 500, Euro, Gold).
• No specific tickers or ETFs mentioned.
• Time zones and session times relevant for Forex and equity markets.

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Important Disclaimers & Cautions

• The strategy is based on prop trading firm experience with over $4 million earned over 4 years.
• Many traders misuse liquidity and FVG concepts.
• Not every liquidity raid or FVG should be traded; only those aligned with context.
• Avoid trading outside of optimal session times.
• Stop loss placement and risk management are critical.
• The presenter offers an inner circle program for further mentorship (not financial advice).

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Presenter

• Unnamed trader with 14 years of experience in prop trading and institutional concepts.
• Shares proprietary methodology combining liquidity, fair value gaps, and context for high-probability trades.

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Summary

This video teaches a proprietary trading strategy combining session liquidity concepts and fair value gaps to identify high-probability entries aligned with institutional intent and market context. The three-step framework involves:

1. Setting directional bias,
2. Waiting for liquidity raids and closures,
3. Entering limit orders within fair value gaps to target opposing session liquidity.

The method emphasizes patience, risk management, and trading within specific session windows (post 9:30 a.m. ET for indices). Reward-to-risk ratios from 2.5:1 to 6:1 are demonstrated, highlighting the strategy’s potential for significant profitability when applied correctly.