How To Trade Fair Valuation and Liquidity Voids

In smart money trading, liquidity voids and fair valuation are essential concepts for understanding how institutional players move the market. These tools provide insight into price inefficiencies and imbalances that occur when large institutions execute orders. Recognizing these gaps enables traders to anticipate rebalancing moves, improving their trade precision and aligning their strategies with institutional order flow.

This article explores the mechanics of liquidity voids, explains the concept of fair valuation, and shows how you can trade effectively by leveraging these two principles.

What is a Liquidity Void?

A liquidity void is a gap in price action where the market moves rapidly, leaving little or no trading activity between certain levels. These voids are often created by institutional traders when they place large orders that cause sudden price shifts. In the process, the market skips over smaller levels of liquidity, leaving behind a zone where supply and demand are not balanced.

Liquidity voids represent price inefficiencies that the market is likely to revisit at a later point to fill or rebalance. When price returns to these voids, institutions can mitigate unfilled orders, creating trading opportunities for those who recognize the pattern.

Characteristics of a Liquidity Void:

1. Fast, Aggressive Price Move: A liquidity void forms during sharp moves, often seen on higher timeframes.
2. Lack of Consolidation: There is little or no sideways movement between the start and end of the void.
3. Revisit and Fill: Price tends to return to these gaps to fill the void and restore market balance.

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What is Fair Valuation?

Fair valuation refers to the idea that the market will seek to rebalance price after periods of excessive volatility or inefficiency. Markets aim to operate within ranges where supply and demand are in equilibrium—this is known as fair value.

When price moves too far in one direction, creating imbalances or liquidity voids, the market often reverses to rebalance and returns to a more sustainable level. Fair value zones typically correspond to areas of prior consolidation or order blocks, where institutional traders have accumulated or distributed positions.

Key Concepts of Fair Valuation:

1. Mean Reversion: After periods of extreme price moves, the market tends to revert to fair value levels.
2. Order Block Influence: Fair value often coincides with previous order blocks or areas where institutional orders were executed.
3. Balance-Seeking Behavior: The market continuously shifts between phases of imbalance and equilibrium, seeking fair valuation through rebalancing moves.

How Liquidity Voids and Fair Valuation Work Together

The concepts of liquidity voids and fair valuation are interconnected. Liquidity voids signal imbalances in price, while fair valuation provides the market’s tendency to correct these imbalances by returning to a state of equilibrium.

Example of Liquidity Void and Fair Valuation Interaction:

• Step 1: The market makes a sharp bullish move, leaving behind a liquidity void as price rises without consolidating.
• Step 2: Institutions eventually push price back down to fill the void, mitigating unfilled orders and restoring liquidity.
• Step 3: The market returns to a fair value zone—usually marked by prior consolidation—before resuming the original trend.

How to Identify Liquidity Voids on the Chart

1. Look for Rapid Price Movements:
   • Identify sudden, sharp moves with minimal or no pullbacks—these are signs of liquidity voids.
   • Liquidity voids are often marked by long candles with very little overlap between their open and close levels.
2. Mark the Start and End of the Void:
   • Use horizontal lines to mark the high and low of the move that created the liquidity void.
   • This forms the gap zone that the market is likely to revisit.
3. Confirm the Imbalance:
   • Check for low trading volume or minimal price interaction within the void, confirming the imbalance.

How to Trade Liquidity Voids and Fair Valuation

Trading liquidity voids and fair valuation involves waiting for price to return to these zones and taking advantage of the rebalancing move. Below are two strategies you can use to capitalize on these opportunities.

Strategy 1: Reversal from a Liquidity Void

This strategy focuses on capturing the rebalancing move when price returns to fill the liquidity void.

Steps to Trade a Reversal:

1. Identify the Liquidity Void: Spot a sharp price move with minimal pullbacks.
2. Wait for Price to Revisit the Void: Be patient and let the market return to the gap zone.
3. Enter on Confirmation: Look for reversal patterns such as pin bars or engulfing candles when price fills the void.
4. Set Stop-Loss: Place your stop-loss just beyond the liquidity void to manage risk.
5. Target: Aim for a fair value zone or the midpoint of the prior range as your take-profit target.

Strategy 2: Continuation After Filling the Void

In this strategy, the focus is on continuation trades. After the liquidity void is filled, price often resumes the original trend, allowing traders to enter with confirmation.

Steps to Trade the Continuation:

1. Identify the Void and Fair Value Zone: Mark the liquidity void and identify areas of prior consolidation near the void that may act as fair value.
2. Wait for the Retest: Let price fill the void and bounce off the fair value zone.
3. Enter on the Retest: Enter a continuation trade when price shows signs of rejecting the fair value zone.
4. Stop-Loss and Target: Place your stop-loss below the fair value zone (for long trades) or above it (for shorts). Use the next swing high or low as your target.

How to Use Fair Valuation in Conjunction with Other ICT Concepts

Fair valuation works best when combined with other smart money concepts such as order blocks, market structure shifts, and liquidity pools.

1. Order Blocks: Look for fair value zones that coincide with order blocks—these areas offer strong support or resistance.
2. Market Structure Shifts (MSS): Use liquidity voids to confirm shifts in market structure. When price fills the void, the new trend direction becomes clearer.
3. Liquidity Pools: Watch for fair value levels that align with liquidity pools—these levels often attract institutional orders.

Common Mistakes to Avoid

1. Entering Too Early:
   • Always wait for confirmation signals when trading liquidity voids or fair valuation zones. Jumping in too soon increases the risk of getting caught in further manipulation.
2. Ignoring the Larger Trend:
   • Ensure your trades align with the overall market structure. Trading against the trend reduces the probability of success.
3. Overtrading Liquidity Voids:
   • Not every liquidity void offers a valid trade setup. Focus on those with clear confluence from other smart money concepts like order blocks or market structure shifts.

Conclusion

Liquidity voids and fair valuation are essential concepts in smart money trading that reveal how institutions manage large orders and rebalance the market. By identifying liquidity gaps and waiting for price to return to fair value zones, traders can position themselves alongside institutional flows and capture high-probability setups.

Combining these concepts with other ICT tools—such as order blocks, market structure shifts, and liquidity pools—will enhance your ability to trade with precision and confidence. With time and practice, mastering these principles will significantly improve your trading performance.