Fair Value Gaps + Initial Balance: The Secret Combo Smart Traders Use

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Video Transcript:

This is Friday’s initial balance. When price breaks below the initial balance and can’t break back above, then we’re going to trend lower  and obviously, we did. We trended lower into this external liquidity. Now, when price comes back to retest the IB, it’s going to do one of two things: it’s going to reject, or it’s going to reestablish back above. If it reestablishes back above and then holds the bottom, that’s very bullish, and we can use that to target the midpoint and the high of the day.

Here we have a 15-minute chart. There’s a 15-minute fair value gap created back inside the initial balance. We had another candle above it, but this was not a breakaway candle, so we can use it as a reference. What price does at this fair value gap will determine if we reject and go lower, or if we hold and go higher. Going back to that at 1:45  that was this right here. That’s why I marked it. This was the dip into that 15-minute fair value gap.

Now, this is a one-minute chart. It’s not very clear. On the two-minute, we still have multiple gaps. On the three-minute, still multiple gaps. On the four-minute, we inverted the four-minute fair value gap after delivering from the 15-minute fair value gap. This was a great trade. I think we were in Q&A at this time, or just coming out of it. This right here is that trade.

If we reestablish back above the IB, we’re going higher. If we reject it, we’re going to attack the lows. This 15-minute fair value gap was the line in the sand. If we disrespected it to the downside, we could short toward this area. If we respected it  meaning the 15-minute fair value gap held right at the IB low  that means price inside the IB is now being accepted again, which targets the midpoint and then the high. That was the reasoning behind that, and it was a very good setup. I’m glad you pointed it out because it was probably even better than the first setup here.

We didn’t have a close above this level until this candle. Once this candle closed, you could move the trade to break even. But when you have this, make sure price doesn’t come back above and reject. It was still a very good play, coming from a strong area. The only issue was that the initial high was pretty close, so sometimes price can go a bit higher and then dip back below. But the price action here around the initial balance was excellent. This wasn’t just a random pattern in the middle of the day  it had context. And with that context, you should have more confidence to hold the trade.

Once this candle broke above, you could go break even and start taking profits at these levels. That’s all I meant by that. This trade had excellent context. The trade down here was simply a move back to the initial balance. Once we’re inside the initial balance, we’re respecting it, and we can anticipate moves to the middle and then the high. That’s why the initial balance is such a powerful tool to have on your chart  it gives you additional structure that many traders don’t see or understand.

Because if we didn’t have the initial balance here, what I’d see is bearish price action  a bearish fair value gap right here. So what would ICT traders do? They’d short this fair value gap and target the lows, because that’s what ICT traders do  they see a bearish fair value gap. But when you add the initial balance, price is now consolidating inside that bearish fair value gap while also back inside the IB. The IB gives you a bullish perspective even though we’re inside a bearish FVG. See that?

So immediately, I’m not bearish here until we invert this 15-minute fair value gap to the downside. This was perfect because the fair value gap displacement was right at the IB low. Now, most people aren’t trading at 2 o’clock on a Friday, but that was a great setup. That’s why the initial balance is such a great tool  it gives us structure. And this IB structure is much more important than the fair value gap.

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.