Inversions and Fair Value Gaps

Inversions

  • Inversions occur when a fair value gap (FVG), such as a CBI (bearish FVG), is closed over or disrespected.
  • After an inversion, price may retrace into the zone of the old FVG or continue moving higher.

Fair Value Gap (FVG) Reminder

  • A three-candlestick pattern:
    • Bullish FVG: The first candle's low does not overlap with the third candle's high.
    • Bearish FVG (CBI): The first candle's high does not overlap with the third candle's low.

Consequent Encroachment

  • Represents 50% of a fair value gap.
  • Calculated using a Fibonacci tool from the high to the low of the FVG.
  • If price respects the consequent encroachment, it's anticipated to move higher.
  • If price violates the consequent encroachment, it's anticipated to move lower.

Examples of Inversion

Example 1: Euro USD (60-minute to 5-minute Chart)
  1. Hourly Sweep: An hourly sweep occurs.
  2. Drop to 5-minute Chart: Watch for a bullish FVG to be disrespected.
  3. Identify Bullish FVG: Mark out the bullish FVG.
  4. Inversion: Price closes below the bullish FVG, creating an inversion.
  5. Anticipate Price Movement: Expect price to reach back into this area or sell off.
  6. Entry Strategies:
    • Market sell.
    • Retest of the inversion with a stop above an opposing candle, targeting lows.
  7. Outcome: Price is tagged in, fair value gaps support price lower, and lows are hit.
  8. Return to Hourly Chart:
    • Buy stops are taken, and price runs to the other side of the range.
    • Sell-side liquidity is swept.
    • After taking lows and closing back inside, external liquidity is swept.
    • Internal liquidity is present, providing a framework to trade in the opposite direction.
Example 2: 5-minute Chart (After Sweeping Lows)
  1. Consolidation: After taking lows, price consolidates, creating a range.
  2. Failed Attempt to Move Higher: Price retraces into a fair value gap but closes lower, making a new low.
  3. New Low: Sell stops are swept, and a fair value gap is created.\n4. Inversion: Price trades and closes over this fair value gap.
  4. Entry Adjustment: If the initial entry doesn't meet the required risk-reward ratio (e.g., 1R), adjust the entry.
  5. Consequent Encroachment Entry: Mark out the consequent encroachment of the CBI and look to enter there.
  6. Outcome: Entry is hit, price respects a fair value gap, and continues into the hourly CBI.
Example 3: 2-minute Chart
  1. Aggressive Move: There is an aggressive move down and then back up.
  2. No Follow-Through: After sweeping highs, price fails to close outside the range and falls back in.
  3. Consolidation: Wait for manipulation or external range liquidity to be hit.
  4. Respect for FVG: Price respects a fair value gap and trades to sell-side liquidity.
  5. Another Sweep: Price cannot displace out of the range, and another sweep occurs.
  6. CBI Formation: A CBI is present.
  7. Inversion Confirmation: Wait for a close over the CBI.
  8. Close Over the Consequent Encroachment: Provides a hint, but wait for a close over the CBI for confirmation.
  9. Entry: Look for a return to this CBI with a stop on the low, targeting the other side of the range for partials or full take profit.
  10. Outcome:
    • Price returns to the inversion and respects the consequent encroachment.
    • Price sweeps one more time before displacing over, validating it as an order block.
    • Price respects the order block and continues higher to make a new high.

Using Inversions within a Trend

  • In an uptrend (making higher highs), look for higher lows to be put in.
  • Propulsion Block Example: An order block off an order block.
  • When price retraces to a propulsion block, it creates a fair value gap (CBI).
  • When price closes over the CBI, it's an opportunity to enter the trend.
  • Opposing PD arrays that fail in a trending market offer opportunities to join the trend.

Using Old CBI's and BISI's

  • Old fair value gaps can be used for reaccumulation or redistribution.
  • On the sell side of the curve, look for smart money reversal, change in the state of delivery, inversion, market structure shift.
  • On the buy side of the curve, old fair value gaps from the sell side of the curve can support price higher.
  • Example: An old fair value gap is traded above and then used as support to trade higher.
Example: Gold Daily Chart
  1. Equal Highs: Equal highs are present.
  2. Mark CBI: Mark out the CBI.
  3. Smart Money Reversal: Look for a close over the CBI and down-close candles.
  4. Short-Term Low: A short-term low should be put in.
  5. Confirm Smart Money Reversal: Identify any old fair value gaps on the sell side of the curve.
  6. Price Action: When price closes over this fair value gap, it can then use it as support to move higher.
  7. Outcome: Prices reaches back into this old fair value gap, leading to a sweep of buy-side liquidity.
  • Old CBI's drawn to the buy side of the curve or old BISI's drawn to the sell side of the curve can be used for reaccumulation or redistribution.