Fair Value Gap (FVG) trading is a strategy used by price action traders to identify market imbalances and inefficiencies. Here’s a concise overview:
What is a Fair Value Gap (FVG)?
A Fair Value Gap occurs when there is a significant price movement caused by strong buying or selling pressure, leaving a gap on the price chart. This gap is seen as an area where the market has not traded efficiently, creating an imbalance1.
How to Identify FVGs
FVGs are typically identified using a three-candlestick pattern:
Bullish FVG: Forms when the top wick of the first candlestick does not connect with the bottom wick of the third candlestick.
Bearish FVG: Forms when the bottom wick of the first candlestick does not connect with the top wick of the third candlestick12.
Trading FVGs
Traders use FVGs to predict potential price movements:
Entry Points: FVGs can act as support (bullish) or resistance (bearish) levels.
Exit Points: Traders often exit trades when the price revisits the FVG, expecting a correction2.
Benefits and Limitations
Benefits: Helps in identifying potential reversal points and market corrections.