SMT + Fair Value Gaps: Step-by-Step Trades from Our Live Room

You know, we came in this morning kind of mixed. We still had bearish order flow. We have not confirmed bullish order flow, but we had a displacement down and a displacement back up. So these are conflicting types of moves. In one case, you have a massive displacement down, but then in the other case, you have a massive displacement up. A lot of times, when you have continuation moves, you’ll get a displacement like here and here, and then the move up will not have any displacement and it’ll come back down. But when a displacement is followed by another displacement, sometimes and most times it means something different. But we still can’t have an official bullish bias until we inverse this. And if you look at some of the higher time frames, it was very conflicting. For example, the 4-hour before 10:00 had not inversed its fair value gaps. The 6-hour did, the 8-hour didn’t, and the 12-hour did. So you can imagine not confusion, but cautiousness. On one hand, we are taught to make sure that these gaps are filled and inversed, which indicates a change of order flow before we act. But on the other hand, this strong displacement out of this area also indicates strength in the other direction, and obviously that played out.

So coming into this morning, we had a couple of areas we wanted to watch. We had London lows on both, and we had London highs and previous day’s highs on both. A little bit higher around here I don’t have it marked anymore was, I believe, Wednesday’s or maybe Thursday’s, or maybe yesterday’s initial balance high. So we were looking for this area to be tapped into anyway, regardless. We had a lot of areas down below that we were looking at, plus trend line liquidity, but then at 7:00 to 8:00 and 8:00 to 9:00, we got a move lower, which took out London low, but ES didn’t. ES held its 1-hour fair value gap even though the NQ didn’t. But if you look at the 4-hour chart, you have this 4-hour fair value gap here, which overrules anything on the 1-hour. So with these holding and forming SMT, we’re on the shorter-term time frame charts when these happen.

So let’s go to the first opportunity. We had a move and we created the SMT. We’re right around 8:00 or so, and we get this inverse fair value gap right here, which was at 8:40. That was a valid trade and that was one entry that could have been taken. We had SMT with London low, but that’s it. We didn’t have SMT bar to bar, so it’s kind of a weird SMT. You can see here, here, here, and here, we don’t have SMT, but at the London lows, we do have SMT. It was just very weird, so that kept me personally hesitant about this trade. Also, we’re kind of at a weird time. We’re manipulating down at 8:00, which is kind of early without news. Usually it’s 8:30 or 9:30, so I’m looking more toward the 8:30 time, and this is why time is important.

At that time, we’re on the one-minute chart. I was still moving around, and we really didn’t look for anything here because there was no inverse. This was kind of a V formation, and I wouldn’t have done anything with this. We are long-biased because we’re delivering from a 4-hour, and we have SMT at London lows, so we’re leaning bullish first, not bearish. As soon as we get this manipulation at 9:00, which gives us a nice 9:10 or 9:15 entry, this is a good area because it’s just right before the market opens and we can start to see price expand. This was the first trade that I liked and took. The target was London highs and previous day’s highs, which we hit nicely.

I usually like to go for a base hit because, especially when price is moving before New York opens, sometimes you get that turtle soup before higher. There was no need to stay in it. This was actually this one right here sorry, this one right there. This was about a 2.3 to 1 risk-to-reward trade. I thought I’d get another opportunity here, but this closed a little too aggressively and hit London. I know it went a lot higher after, but rules are rules.

By this time, we had inversed the 4-hour fair value gap, so we’re bullish everywhere. After this close and taking out this high and this high, the target is now clear. On this 4-hour candle, we want to buy a dip, but we need something to deliver from. There’s no 4-hour fair value gap, so we have to wait another four hours and go down a time frame. If you look on the hourly, we get a fair value gap here, and you can see it just as clearly on the 15-minute. There’s a bigger fair value gap, but what we’re looking for is an SMT inside that fair value gap, and that’s exactly what we got. This is our indication that we can trade internal to external. Remember, if internal holds and defends, then price will seek external.

It’s funny how close this was. We thought this data high would be taken, and look how close it was just ridiculous. ES took it. When price came down there with that SMT at that level, I was right here. This was taken off the 30-second chart. We had SMT with ES right there, SMT inside the 15-minute fair value gap, and we had a clean 30-second inverse fair value gap. This trade was taken to that high right there. Remember, we’re just looking for base hits, and this was a 3-to-1 risk-to-reward trade, which is hardly a base hit. A base hit is more like one and a half to one. A one-to-one is like a bunt. For those of you overseas in London, I’ll explain that terminology at our next Q&A. Elizabeth, if you’re watching, I apologize.

That was the second good trade of the day. I expected this to go to data high and continue higher. If you look, ES did hit external out of this level, but the problem is that when that hit external, the NASDAQ didn’t. We gave it a couple of minutes, and once ES started to pull back from that key level, you have to get out. You can’t wait for that level because ES has already hit its target. You could be looking at an SMT, and as you can see, we had about a 60 to 65-point drop. It did go higher, but no one wants to sit through that, and it’s probably going to take you out at break-even or with a trailing stop anyway. When ES hits first and you’re waiting on the other one, give it a minute or two. If the other one starts to pull back and you see a move like this or it inverses a 30-second, just get out.

Hey everyone, it’s Dale here. I hope you enjoyed the video. If you’d like to trade alongside me and our team of prop firm funded traders every day, click the link below the video and hop aboard. We’re looking forward to trading with you.