Fair Value Gap + Volume Profile: The Perfect Combo for Smart Money Trading

Hello everyone, it’s Dale here. In today’s video, I’d like to talk about the Fair Value Gap. A Fair Value Gap is a concept from Smart Money analysis, and I also use it in my Volume Profile trading. Today, I’d like to show you how you can implement it into your trading as well.

Let me start with a little definition of what the Fair Value Gap is. I’ll do a little drawing here. Basically, this is based solely on price action, and you need three candles. Let me draw them real quick. This is a bullish scenario of a Fair Value Gap. Here is candle number one, candle number two, and candle number three. What you need to see here is the gap between the low of this candle and the high of the first candle, right? If there is that gap, and they don’t overlap, then this whole area is a Fair Value Gap. It’s important that the wicks don’t overlap. If the wicks, for example, overlap like this, then there would be no Fair Value Gap, right? This was the bullish scenario. Now let me draw the bearish scenario. It’s the same, only reversed. Here’s candle number one, candle number two, and candle number three. Now, because the low of the first candle and the high of the third candle don’t overlap, the space between them is a Fair Value Gap. This whole zone is a bearish Fair Value Gap. Again, if the wicks overlap like this, then there would be no Fair Value Gap. But because they don’t overlap in this case, we have a Fair Value Gap.

Now, why am I talking about the Fair Value Gap? Because the Fair Value Gap represents a strong support or resistance zone. In a bearish scenario, you would wait for a pullback, and this would be a resistance zone, so you would expect the price to react somewhere in this zone. The way I trade this bearish scenario is to go short from this place, from the border of the Fair Value Gap. This is the short zone.

Now, let me quickly draw the bullish scenario again. For example, in this case, this is the Fair Value Gap. You wait for a pullback, and this should work as a support, allowing you to go long from there. I personally take my long position from this place, from the beginning of the Fair Value Gap. Alright, so this is the bullish scenario, and this is the bearish one.

The Fair Value Gap represents a place of aggression where sellers or buyers were really pushing the price aggressively in their direction. That’s why the price tends to react to this place, especially to the beginning of the Fair Value Gap, which is where I trade from the most. Now, I don’t trade the Fair Value Gap as a stand-alone setup, but I combine it with Volume Profile setups.

Let me just go to the chart and show you this indicator, which automatically draws the Fair Value Gaps. I currently have it set to only show Fair Value Gaps that are still active and haven’t been tested yet. For example, if you look here, let me zoom in some more. This is candle number one, below that is candle number two, and the next one is candle number three. As you can see, there is that gap between the low of the first candle and the high of the third candle. This whole zone is the Fair Value Gap, and the indicator draws that automatically.

Now, for a bullish scenario, you can look here. This is the first candle, this is the second, and this is the third. The gap is here, between the high of the first candle and the low of the third candle. This is a bullish Fair Value Gap. So, this is how the Fair Value Gap looks. As you can see, the indicator draws them automatically. It only shows Fair Value Gaps that haven’t been tested yet—those are the ones I’m looking to trade.

I like to combine this with Volume Profile setups. Let me show you a couple of trading levels that I currently have. Let me start with the trade I sent you a couple of days back on the EUR/USD. This was the gap in this zone. The indicator no longer shows it because it has been tested here, but there was this gap. I also used Volume Profile here, and the Volume Profile showed me that there was a heavy volume zone with a strong rejection of low prices, which is an important sign of strong buyers. At the same time, there was that Fair Value Gap, and the low of the Fair Value Gap was here. This very nicely aligns with the Volume Profile here, with that volume cluster. It was the combination of these two—the Volume Profile and the Fair Value Gap—that told me this was a strong level to go long from. That’s why I entered the long position from here, as I showed you in that video a couple of days ago.

Alright, so that’s how I combine Volume Profile and the Fair Value Gap. But this is a trade that has already played out. Let me now show you a couple of examples of levels that I currently have and that haven’t been tested yet. If you look here on the EUR/USD 30-minute chart, there are two levels. The short one is this one at 1.11156, based on the heavy volumes in this area and the beginning of that Fair Value Gap. This is the Fair Value Gap, and this is the beginning of the Fair Value Gap. So, there’s a nice combination of Volume Profile and Fair Value Gap. Now, I just wait for the pullback and go short from there.

There’s also a long level at 1.1097, again based on Volume Profile with those heavy volumes here and the Fair Value Gap, which is this greenish zone here. The bottom of that green zone is here. As you can see, it very nicely aligns with the Volume Profile setup. My level is just a couple of pips below the Fair Value Gap because if the price comes here, I think it will want to at least touch those heavy volumes here. That’s why I place the level a little bit lower. So, that’s my long level. I expect the price to react from there and go upwards.

Now, here is another chart—this is the AUD/USD. Again, the software shows the Fair Value Gaps, so they’re nicely visible here. In this case, the long level that I have at 0.6750 is based on heavy volumes formed within this rejection of lower prices and also on that Fair Value Gap here.

Let me show you one more thing. As I was saying, if you remember, this is a formation of three candles, but sometimes there are actually two gaps, one after another, like here. There could be a gap like this one, and another gap like this one. The first gap would be based on these three candles, and the second gap would be based on the next three candles. If you see two gaps like this one on top of each other, then I look at it as one big Fair Value Gap. In a long trade scenario, I trade from this level, from the beginning of that gap. That’s where my long level is. It’s a combination of the Volume Profile and the Fair Value Gap.

Now, another market is the USD/CAD. Here we have a bearish scenario with a huge gap. Again, I count this as one large gap—the bigger the gap, the better, because the bigger the gap, the more strength was behind the move the gap is based on. This already shows the aggression and strength of sellers, which is what I like to see when trading shorts. Here, I have this heavy volume cluster within this rejection zone as well as that Fair Value Gap. For a short trade scenario, this is the place I want to go short from, the beginning of that Fair Value Gap. So, that’s the Fair Value Gap—actually, just this—this is the Fair Value Gap, and I want to trade shorts from the beginning of that Fair Value Gap, like this.

A very similar case, just really quickly, is on the USD/JPY. Again, I have a long level here, based on this Fair Value Gap. This is the beginning of that Fair Value Gap at 142.30. Again, we have a nice heavy volume zone here, so that’s why I picked this level to trade from. Now, I’m just waiting for the pullback, and then I’ll go long.

I’m not sure if I mentioned this before, but gaps that have been tested in the past don’t interest me anymore, and they don’t show on the chart. The indicator doesn’t show them. I’m only interested in gaps that haven’t been tested yet. Those are the ones that the indicator prints.

Now, let me show you one more example of a trade I had. It was on the NQ, and it was actually a prediction I sent you earlier. The level I had here was this one from this place, and it was based on those heavy volumes and the Fair Value Gap. As I was saying, the software doesn’t show it anymore because it has been tested, but I’ll draw it for you. The gap was from here to here—this was the Fair Value Gap, and the beginning of that Fair Value Gap was here. As you can see, this again very nicely aligns with the heavy volumes in this volume cluster. The price made a pullback, went all the way to the bottom of the Fair Value Gap, and from there, a beautiful reaction.

Alright, so that’s the Fair Value Gap, one of the Smart Money concepts. If you guys are interested in learning more about combining Volume Profile and Smart Money concepts, then you may want to check out the Funded Trader Academy. Here, my team and I meet every day in a live trading room, where we teach traders how to trade, how to get funded, and how to become professional prop firm funded traders in less than 12 months. Below this video, there’s a link that will take you to the Funded Trader Academy page. There’s a video there that will show you everything that’s included. If you’re interested, you can then book a call to see whether this would be a good fit for you or not.

Alright, so that’s about it. Thanks for watching the video; I hope you guys liked it. Below this video, I’ll also drop a link to download this Fair Value Gap software for the NinjaTrader 8 platform. So, that’s about it. Thanks for watching, and I look forward to seeing you next time. Until then, happy trading!