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By Admin
Posted on December 5, 2024
Many people are confused about the difference between FVG (Fair Value Gap) and Liquidity Void. Today, I’m going to explain clearly what they are and the difference between them.
To understand all of this, make sure to read the entire article. It will definitely help you. So, let’s get started!
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An FVG (Fair Value Gap) forms on the chart when three consecutive candlesticks of the same color appear, and the shadows of the 1st and 3rd candlesticks do not overlap with the body or shadow of the middle candlestick. This gap between the 1st and 3rd candlesticks defines the FVG.
By looking at this image, you will understand what I am trying to explain.
A Liquidity Void is an area where the market moves so quickly that buying and selling are barely possible. In a liquidity void, the orders placed there don’t get triggered. This happens because the huge price movement above and below that area creates a gap, making it so that the orders in that region aren’t filled due to the rapid price movement.
FVG (Fair Value Gap) and Liquidity Void are two important concepts in trading that describe different market conditions. Both have distinct characteristics and implications for traders.
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| Feature | FVG (Fair Value Gap) | Liquidity Void |
|---|---|---|
| Formation | Occurs when three consecutive candlesticks of the same color appear, with the middle candlestick having no overlap with the shadows of the first and third candlesticks, creating a price gap. | Formed when the market moves extremely fast, creating a gap where buy and sell orders can’t be executed. The price moves so rapidly that it leaves no orders in that area. |
| Price Action | Price typically retraces to fill the gap, which offers traders opportunities to enter at favorable levels or catch price corrections. | Price moves too quickly for orders to be filled, often leaving the gap unfilled. The market may return later to fill this void. |
| Market Conditions | Occurs in a normal or trending market where there is an imbalance between buying and selling pressure, leading to the formation of the gap. | Occurs during periods of extreme volatility, such as news releases or rapid market movements, where the price skips over certain price levels. |
| Impact on Trading | Traders often look for price to return to the gap area to enter trades, assuming the gap will be filled, indicating a potential reversal or continuation. | Traders avoid these areas due to the unpredictable nature of price action. It’s difficult to place orders, and the market may not return to fill the gap immediately. |
| Liquidity | Liquidity is generally present before and after the gap, but there is an imbalance of buy and sell orders within the gap itself. | Liquidity is almost completely absent in these areas due to rapid price movement, making it difficult to execute trades in the void region. |
| Use in Trading | Used to identify potential reversal or continuation points. Traders look for price action to return to the gap area for potential entries. | Traders generally wait for the price to return to the void area before acting, as entering during the rapid price movement is too risky and uncertain. |
| Trading Strategy | Traders often trade the gap fill, waiting for price to retrace to the FVG and then enter a trade in the direction of the overall trend. | Traders may wait for confirmation that the liquidity void has been filled or that the market has settled before entering positions. |
| Risk Factor | Moderate risk as gaps often get filled, but traders must consider market conditions and timing to minimize risk. | High risk due to the volatility and unpredictability of price action in these areas, requiring more caution before entering trades. |
| Example of Occurrence | A gap in price between candlesticks due to a shift in market sentiment or news, such as a break in a trend or a market correction. | Occurs during rapid price moves, such as when market reacts to unexpected news or events, creating sudden gaps in price action. |
Both FVG (Fair Value Gap) and Liquidity Void are essential concepts in trading, but they represent different market conditions. An FVG signals an area of imbalance in price action where price is likely to retrace and fill the gap, presenting potential trading opportunities. On the other hand, a Liquidity Void occurs when the market moves too rapidly, leaving behind an empty space where orders aren’t filled, making it a more difficult area for traders to operate in.
Understanding the differences between these two concepts helps traders make informed decisions on entry points, risk management, and overall market strategy. While FVGs offer opportunities for correction and continuation, liquidity voids highlight areas of extreme volatility that require careful analysis and caution like Liquidity Sweep.
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Happy Trading for all the traders.
