No worries, I can take it. And I only block people if they're rude AND provide nothing of substance. Bust my balls if you feel like it, long as you're helping me learn somehow!
Fair Value Gaps
- Thread starter Dollardogs
- Start date
Hello Dollardogs,
I am not sure what Fair Value Gap means. I can not help you on this subject.
I think you need to move up to the street sense. FVG on a price chart doesn't exist -- unless you can point at a price and say "that is fair value". How are you even assessing fair value... ?
Lots of ways to think about FV -- I'll give you an example on the disc fundamental side:
(1) you see XYZ stock's earnings outlook (nfy and nfy+1) and assess the range of views (range of analysts can be significant)
(2) you do your own research to see where you think earnings is more likely land
(3) you take the average multiple (p/e for example) since last earnings, and price your earnings forecast
(4) you compare this price vs. today's price
(5) the difference is a fair value gap
No worries, I'm sure you will fill one of my other threads with powerful insights!
Good point. Is there another term for gaps likely to be filled I should be utilizing instead? Because I've gotten good results anticipating gap fills off the daily chart and based on premarket gaps so far.
Typically, intraday gaps can be caused by "liquidity provisioning", but a lot of it may be driven by changing gamma sign of option dealers, as they are not price sensitive. If you can model gamma, charm, and other second order greeks, you'll be able to assess a value gap and trade it. I actually know people that do this and do it well (at well-known hedge funds) and it's pretty cool.
Cash markets are for liquidity, price discovery occurs in the derivatives market.
OP, don't worry about the correct term. People are going to argue semantics with you either way. Gap, open gap, FVG, ICTFVG...potato potahtoe.
A plebian answer is you can use gaps to gauge conviction in a move. Since you're talking about intraday, pull up a chart of a strong trend day; you're probably going to find open gaps spread throughout the day.
Now pull up a chart of a trading range day. Look for a turning point/failed turning point that took place...did the gap fill and immediately reverse? Did it fill and keep grinding higher/lower? Did it blow right through the BO attempt and keep moving fast in the original direction? Price is giving you context.
All gaps fill unless they don't.
A plebian answer is you can use gaps to gauge conviction in a move. Since you're talking about intraday, pull up a chart of a strong trend day; you're probably going to find open gaps spread throughout the day.
Now pull up a chart of a trading range day. Look for a turning point/failed turning point that took place...did the gap fill and immediately reverse? Did it fill and keep grinding higher/lower? Did it blow right through the BO attempt and keep moving fast in the original direction? Price is giving you context.
All gaps fill unless they don't.
Amen! People really love to waste time arguing semantics here. But I like your idea alot: of comparing how gaps fill (or don't) on trending vs ranging days. Not sure what to do with it yet, but it's def sparking some ideas for tweaks to how my system currently works. Thanks!
Most likely FVG's in this thread has been referring to the concepts of liquidity and imbalances as being popularized by Inner Circle Trader - ICT aka Michael J. Huddleston. He claims to have authored these concepts as well as the IPDA - Intermarket Price Delivery Algorithm.
His main grievance is having students of his mentorship (et al) marketing them for their own mentorships and not properly attributing the concepts and "his" work to him. For the last couple of years he's been releasing his work freely on Youtube and Twitter to put these folks out-of-business.
He's grown quite a retail following in this short period of time and has attracted both loyalists and critics alike. He also has a running bounty of $5mil for anyone that can prove "his concepts" were around prior to 1996, the year his started teaching his method.
ICT (as far as I know) trades forex and futures, not equities nor options.
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I just looked the guy up and read through his ideas — absolute batshit. I worked on a rates & fx desk at major bulge bracket desks… that’s not what we do lol.
Seems like his IPDA thing is a very bad reading and analysis of this New York Fed paper on interbank trading and liquidity provisioning (https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr550.pdf).
Dealer markets (interbank) is not very delta speculative. That means the pnl of a desk is not based upon betting a currency is going to go up or down. The major sources of pnl for bank desks are things like fx and rates vol, niche carry, and treasury basis. On the bank desk you’re worried about things like adverse selection and need to capture a wide enough spread to compensate you for that while still winning business (getting to fill, by being more competitive in pricing).
What’s that saying…? “I feel sorry for the fools…”