Video Transcript:
Okay, so today we are going to talk about a swing trade that we took on USD/CAD that fits right in line with our general methodology that can be used in swing trading or in day trading. Okay, so let’s start off by giving a little narrative on how we built into this trade.
At the beginning of last year, we had tapped in and taken out two major areas of liquidity, the highs from March 2020 and then the highs from January 2016. This started to set the stage. We had an accumulation right here for a while that led to a manipulation move into those areas to grab liquidity.
Now here’s where things get interesting and where the market really gives us direction on what to do. If you notice, on the way higher we created this imbalanced fair value gap. Once we took out that liquidity with momentum, we inversed that monthly fair value gap. That was the first indication that this was a manipulation. Liquidity and highs had already been taken, and with the inverse of this fair value gap, we were now being shown that the monthly order flow was possibly changing from bullish to bearish.
We use fair value gaps as a gauge for order flow. If price is respecting bullish fair value gaps and disrespecting bearish fair value gaps, then we are bullish. If price is disrespecting bullish fair value gaps and respecting bearish fair value gaps, then we are bearish. As price inversed this fair value gap, it also created a bearish fair value gap on the way down. This set the stage for what we wanted to do because it created a monthly fair value gap that we were looking to tap into.
If price respects this monthly fair value gap, we expect price to draw toward the external liquidity level, which are these lows right here made after the inverse of that fair value gap. All eyes were on this monthly fair value gap that was created back in April 2025. In November, we started to tap into that monthly fair value gap, and off that level we look for a pattern where price changes order flow to bearish on the shorter time frames, based on that higher-timeframe analysis.
When price came into this monthly fair value gap, the short-term price action on the daily chart was bullish. But if we wait for price to turn bearish on the daily time frame, that gives us the signal that short-term price action is now turning bearish and aligning with the monthly fair value gap and overall monthly structure. When we combined that with an SMT on the dollar index, where the dollar index made a high and USD/CAD did not, it gave us an indication of price going lower.
This was a swing trade we took at the end of the year when price inversed this fair value gap. We took shorts from this area and targeted the liquidity below, which price eventually hit. On the way down, price created a weekly fair value gap, and this became the basis of our next trade. The draw on liquidity was still the monthly low, so any rally into this weekly fair value gap could be used as a short toward that level.
Once the weekly fair value gap was created, we used a retrace into that gap in the same way we used the monthly fair value gap. The monthly draw was the external level, and the weekly draw was the weekly external level. For this trade, we focused on using the higher-timeframe draw and then using a lower-timeframe internal-to-external model to frame the trade.
We then dropped down to the 6-hour chart, where we saw the same things we saw on the higher time frame. We saw an inverse fair value gap, short-term liquidity taken, and a reversal of order flow from bullish to bearish. We took the short from the 6-hour chart, placed our stop above the inverse fair value gap, and targeted the weekly external liquidity level, which was just hit today.
This trade delivered just over an 8:1 risk-to-reward in about 11 to 12 trading days. Now that price has hit this area, the weekly internal-to-external move has been completed. Profits can be taken, and runners can still be held toward the monthly external liquidity level, which is the final target of the larger monthly move.
That’s basically how we trade. We use fair value gaps as internal liquidity and look for price action at those levels to trade toward external liquidity, which in this case was recent pivot lows. If this were a bullish scenario, it would be recent pivot highs. This turned out to be an excellent trade for the community, and USD/CAD has been great to trade since the end of December.
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 look forward to trading with you.
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