Understanding Fair Value Gaps (FVG) in Trading: An In-Depth Guide
Hey there, traders! Today, we're diving into the fascinating world of fair value gaps (FVG). This concept is a crucial part of the smart money concepts (SMC) that seasoned traders use to spot potential entry points and market inefficiencies. By the end of this post, you'll have a solid grasp of what fair value gaps are, how to identify them, and how to use them in your trading strategy.
What is a Fair Value Gap?
A fair value gap (FVG) occurs when there are significant movements in the market, often due to momentum candles, creating temporary inefficiencies. During these gaps, either buyers or sellers dominate, leading to what we call bullish fair value gaps or bearish fair value gaps. Understanding these gaps can provide valuable insights for day trading and forex trading.
Fair Value Gaps (FVGs)
Identifying Fair Value Gaps
Bullish Fair Value Gap
Spot a Momentum Candle: Look for a strong momentum candle. As a rule of thumb, this candle should be at least twice the size of the previous candles, though larger is better.
Identify Surrounding Candles: Locate the candle before and the candle after the momentum candle.
Draw Your Lines: Draw a line from the highest point of the preceding candle and the lowest point of the following candle. The space between these two points is your bullish fair value gap.
Bearish Fair Value Gap
Spot a Momentum Candle: Similar to the bullish gap, find a strong momentum candle.
Identify Surrounding Candles: Look at the candle before and the candle after the momentum candle.
Draw Your Lines: Draw a line from the lowest point of the preceding candle to the highest point of the following candle. The space between these points is your bearish fair value gap.
Bullish and Bearish Fair Value Gap
Using Fair Value Gaps in Trading Strategy
Fair value gaps can be excellent entry points. Here's how to incorporate them into your FVG trading strategy:
Identify Market Trends: Ensure you are aware of the market trend. Fair value gaps are more effective when used in conjunction with a strong trend.
Look for Breaks in Structure: In an uptrend, look for bullish fair value gaps that occur during moves that break market structure. This indicates strong buying pressure.
Set Your Entry Point: Wait for the price to return to the fair value gap and show signs of bullish behavior (for bullish gaps) or bearish behavior (for bearish gaps). This is your signal to enter the trade.
Fair Value Gaps vs. Supply and Demand Zones
It's important to distinguish between fair value gaps and supply and demand zones. While demand zones usually form at strong lows, fair value gaps can appear in the middle of a move. This flexibility makes FVGs a versatile tool in your trading arsenal.
Practical Application
Consider an uptrend where you have identified multiple demand zones. While these zones are great for pinpointing potential reversal points, fair value gaps can help you find entry points within the trend. For example, if you see a bullish fair value gap form in the middle of an uptrend, you can anticipate the price to revisit this gap before continuing its upward move. This revisit can be your ideal entry point.
Conclusion
Mastering fair value gaps can be a game-changer for any trader, especially in the realm of forex, day trading, and crypto trading. By identifying these gaps and understanding how to leverage them, you can make more informed trading decisions and improve your overall strategy.
