Break of Structure (BoS) and Change of Character (CHoCH) Trading Strategy
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Understanding Fair Value Gaps (FVG) in Trading: An In-Depth Guide
Last Updated: March 16, 2025
Key Takeaways
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Fair Value Gaps (FVGs) are market inefficiencies created by strong momentum candles where either buyers or sellers dominate
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Bullish FVGs form during upward price movements, while bearish FVGs form during downward price movements
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The most effective FVGs are created by momentum candles that are at least twice the size of previous candles
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FVGs are particularly powerful when they form during moves that break market structure, indicating strong buying or selling pressure
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Unlike supply and demand zones that typically form at strong highs or lows, FVGs can appear in the middle of a price movement, making them versatile for identifying entry points
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.
FAQ: Fair Value Gap Trading
Frequently Asked Questions
What's the difference between a Fair Value Gap and an imbalance?
While both concepts identify market inefficiencies, a Fair Value Gap (FVG) specifically refers to the space created by a strong momentum candle between the preceding and following candles. An imbalance is a broader concept that can include various types of price disparities. FVGs are a specific type of imbalance that follows a particular pattern with a momentum candle.
How reliable are Fair Value Gaps as entry points?
Fair Value Gaps offer high-probability entry points, especially when they align with the prevailing market trend and occur during breaks in market structure. However, like all trading strategies, they aren't 100% reliable. For best results, combine FVG analysis with other confirmation signals and proper risk management techniques.
Do Fair Value Gaps work in all timeframes?
Yes, Fair Value Gaps can be identified and traded across all timeframes, from 1-minute charts to weekly charts. However, many traders find that FVGs on higher timeframes (4H, daily, weekly) tend to be more reliable as they represent more significant market inefficiencies that are likely to be filled.
How do I know when a Fair Value Gap has been filled?
A Fair Value Gap is considered filled when price returns to and trades through the entire gap area. This means the price must move from one boundary of the gap to the other. Partial fills (where price only enters the gap but doesn't completely traverse it) may still leave some inefficiency in the market.
Should I use Fair Value Gaps on their own or with other strategies?
For optimal results, combine Fair Value Gaps with other Smart Money Concepts like order blocks, break of structure (BOS), and change of character (CHoCH). Using FVGs as part of a comprehensive trading framework rather than in isolation will significantly improve your trading decisions and risk management.
QUIZ: Test Your Fair Value Gap Trading Knowledge
Test Your Knowledge: Fair Value Gaps Quiz
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.
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