Simple Fair Value Gaps

A Fair Value Gap (FVG) is a concept in trading that refers to a three-candlestick pattern where the price action leaves a gap, indicating an imbalance in the market. This gap occurs when the high or low of the first candle does not overlap with the low or high of the third candle, respectively.

FVG Created

No FVG Created

Key Points on Fair Value Gaps:

Formation:

Bullish FVG:

This happens when the high of the first candle does not overlap with the low of the third candle. It indicates a buy-side imbalance and a sell-side inefficiency, where the price moved up quickly, limiting sellers' opportunities.

Bearish FVG:

This occurs when the low of the first candle does not overlap with the high of the third candle. It signifies a sell-side imbalance and a buy-side inefficiency, meaning that the price moved down rapidly, leaving buyers with limited opportunities to enter.

Market Implications:

FVGs often suggest areas where the market might retrace to fill the gap, providing opportunities for traders to enter or exit trades. For example, a bullish FVG might act as support where the price could bounce back up, while a bearish FVG might act as resistance where the price could reverse down.

Application in Trading:

Traders look for these gaps as potential points for entering trades once the market moves to fill the gap. They might also set stop losses just beyond the gap to manage risk effectively.

Bullish Entry

Bearish Entry

‍Inversion:

In some cases, a Fair Value Gap can be inverted, meaning that what was previously a bearish gap (resistance) might act as support in a bullish market, and vice versa.

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Understanding FVGs allows traders to better anticipate market moves, as these gaps are often revisited by price, making them crucial areas for potential trade setups.

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