Lesson 7 Gaps

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Transcript

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So in this lesson we are going to be discussing the different type of gaps that we find within market maker models. So firstly let's talk about the common gap.

The common gap is the most common

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type of fair value gap that we will find. Hence the name common gap.

Right? You can identify a common gap where we have price that runs in one direction.

Whether it's just buy side delivery known as a buy side imbalance, sellside inefficiency or whether we just have

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sellside delivery which is known as a sellside imbalance, buy side inefficiency. Common gaps will fully rebalance.

And if we are in a bullish climate, say for example on the buy side of a market maker sell model after rebalancing the premium end generally

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will act as support. Now a common gap can be traded to many times.

If we travel back below the common gap then the discount end can act as resistance. The common gaps give us our true support and resistance within price action.

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Another type of gap that we see in price action is known as the breakaway gap. Now, generally we will see a breakaway gap either partially rebalance or left completely open and we will generally see this when price is in a hurry to

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move away from a price range. So in this case we have the consolidation and price fails to return to the consolidation leaving this fair value gap partially open.

This also indicates that the algorithm is in a hurry to repric higher

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after we see price break above this high. We do not anticipate price to revisit this area and it should remain left open.

So the breakaway gap is breaking away from a price range. Hence the name breakaway gap.

We also have the

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measuring gap. Now we've briefly spoken about the measuring gap in previous lessons and we know that the measuring gap is found at equilibrium or 50% of the entire dealing range.

Now again measuring gap will either partially balance or it will be completely left

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open. Since we anticipate the measuring gap to form around 50% or equilibrium of the dealing range, we can anchor a fib from the consolidation low to the measuring gap and project one standard deviation higher.

This would give us a

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measured move from the anchor point to where the measuring gap forms. Generally, I like to anchor the fib high in this case of it being on the buy side of the curve to the high of the fair value gap created.

So in this case it

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would be the low of the third candle that forms the measuring gap. We can also use the high of the first candle as an anchor point on the right side of the curve of a market maker cell model after we have a confirmed breaking market structure which if you recall in the

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previous lessons the fair value gap inside of the expansion leg that broke structure would confirm the structure break. Now, we want to see if price wants to fully rebalance that fair value gap and treat it as a common gap or only

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partially fill it and move away from this area. The breakaway gap is confirmed once we break below this short-term swing low.

We then expect price to remain heavy and do not expect price to revisit this area. Again, this

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also indicates that the algorithm is in a hurry to repric lower again. And as mentioned before, common gaps can be revisited many times.

If a common gap is in fact confirmed with a full rebalance when price finds resistance on its premium high and moves

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away from this level, we can expect the discount end of the fair value gap to hold as resistance if price should revisit this area. Another common gap will generally form after the breakaway gap.

And the measuring gap will generally form after the fill of a

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common gap at 50% of the expected range. Now, there doesn't always have to be a common gap before the measuring gap.

But if we do see a gap after a breakaway gap that isn't in line with our expected terminus, then I would expect to treat

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that gap as a common gap. I would anchor a fib to the swing high to the expected measuring gap.

Generally, I would anchor the low of the fib to the discount end of the sellside imbalance, which is the high of the third candle that creates

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the measuring gap. We can also anchor the fib to the low of the first candle that creates the measuring gap.

You can use both levels to see if we can get a confluence of other arrays in price. Now, this is not always going to give you the exact low once we project a standard deviation lower, but in many

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cases, you will find that it does give you the exact low to the pip. When you really understand how these market models work, you will see that there's a lot of symmetry within price action.

If one standard deviation from the measuring gap aligns with our other deviation grades, higher time frame

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level, and within a pip range target, then this is a very high probability measuring gap. We would not expect this to fill and we can therefore adjust our stops accordingly.

This also gives us insight if we are to enter another position below the measuring gap.

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Although your highest probability short entries would be located in the upper 50% of the dealing range from the origin high to the terminus low. Understanding the relationship between measuring gaps, common gaps, and breakaway gaps can give

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you an insight into where we are within the buy or sell programs. In some cases, you will find that this sellside delivery is a sell program in the retracement leg of a market make a buy model where we clear the sellside

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liquidity below the first stage of accumulation and we may key off a fair value gap and an order block in this area to send price back higher. Again, this is why it's important to know what the higher time frame draw is likely to be.

If the higher time frame draw is buy

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side and we have one leg that breaks two stages of accumulation, this can indicate that price has dropped quickly run sell side where smart money would pair the sell stops to accumulate more long positions to offset those positions

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back to buy stops at a higher price above an old high. If the higher time frame is bearish and we have one leg that takes out two stages of accumulation, then this indicates that price is in a real hurry to get lower

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and we are likely to see an extrapolated move to the downside. So blending all of these different things gives us the highest probability of being on the right side of the market and finding the highest probability setups.

Now generally there will be another common

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gap that forms after the measuring gap and this tends to form around 75% of the graded range. If we are to continue lower you will often see price retrace to this common gap and its discount end will act as resistance to send price lower.

As a bonus if we are in the sell

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program on the right side of the market maker sell model we want to look at the common gaps on the left side of the curve. Once price runs through these common gaps, this creates a balanced price range and we would anticipate these gaps to become inverse levels that

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would offer us resistance and keep price from going higher. Again, many times this will be the reason why a breakaway gap will form because there is the balanced price range with a common gap to the left side of the curve.

And this is also true with measuring gaps. Often

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the measuring gaps will overlap at equilibrium of the dealing range. Now, when price is retracing inside of a fair value gap, there are a few things that I look for inside of this gap on a lower time frame, such as the consequent

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encroachment or a 50% level between premium high of the fair value gap and the discount low of the fair value gap. I also look for volume imbalances and areas of where we have balanced

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price action or an area of redelivered rebalance. Your homework is to go back through your charts and look for examples of these concepts in both market maker buy models and market maker sell models.

I would encourage you to

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log your findings in a study journal. So again, thank you for watching and I will catch you in the next lesson.