Fair Value Gap (FVG): The Complete Trading Strategy
Fair Value Gap (FVG) is one of the most reliable concepts in price action trading. It helps you identify zones where the market was imbalanced and is likely to return to find balance.
What is a Fair Value Gap?
A Fair Value Gap occurs when there is a rapid, impulsive price move that leaves a gap between candles. Specifically: there is a gap between the wick of the first candle and the wick of the third candle in a three-candle pattern.
Why Do FVGs Work?
1. Market Imbalance
An FVG is caused by a lack of counterparties. There weren't enough sellers (in a bullish FVG) to match buyers. This leaves a gap the market wants to fill later.
2. Fair Value
The market constantly seeks 'fair value' - a fair price where buyers and sellers agree. An FVG represents a zone where price moved too quickly and not everyone could participate.
3. Institutional Activity
FVGs often arise from institutional orders. The speed and size of the move indicate large players quickly opening positions.
How to Trade FVGs
Strategy 1: FVG Retest
- Identify an FVG on a higher timeframe (4H or Daily)
- Wait for price to return to the FVG zone
- Look for confirmation on a lower timeframe
- Enter with stop loss behind the FVG
- Target the next liquidity zone
Strategy 2: FVG as Destination
- After a strong impulsive move, identify unfilled FVGs
- Use the FVG as your profit target
- Price will likely travel to the FVG to fill it
Common Mistakes
- Seeing every gap as an FVG: it must be a clear impulsive move
- Not waiting for confirmation: entering the FVG directly without confirmation
- Using too low a timeframe: FVGs on 1-minute are too noisy
- Stop loss too tight: give the FVG some breathing room
Conclusion
Fair Value Gaps are a powerful tool for identifying price zones where the market was imbalanced. They are easy to recognize and offer clear entry and exit levels. With patience and the right combination with other concepts, FVGs can significantly improve your trading.
