Fair Value gap (FVG): Best Timeframe, Trading Strategy, Indicator and Quick Tips

Fair Value Gap (FVG) is a part of technical analysis in trading which shows the imbalance in the market. Whenever a difference arises between buyers and sellers, it creates an imbalance, which is called FVG. This happens and works in all markets, such as stocks, crypto, forex, and commodities as well.

Fair Value Gap (FVG) Meaning in Trading

FVG is a very famous price action trading strategy in which traders take trades in the imbalance. Imbalance means that buying or selling was not equal there. It consists of 3 bullish or bearish candlesticks, where the middle candlestick has an imbalance, meaning that is the FVG (Fair Value Gap).

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Just FVG (Fair Value Gap) alone is not enough for trading. In price action trading strategies, you need to pay attention to many factors, and this means looking at other things that come under SMC (Smart Money Concept) like OB (Order Block), Breaker, BoS (Break of Structure), and ChoCh (Change of Character).

This can happen in the market at any time, but if you want to trade it effectively, you should look for it in a trendline or demand & supply zone, preferably after BoS (Break of Structure) or ChoCh (Change of Character).

Which Timeframe is Best for FVG?

The 15-minute timeframe is the best for FVG because it offers quicker targets and smaller stop losses. In contrast, the 4-hour timeframe takes longer and results in larger stop losses.

Intraday Trading: If you want to do intraday trading, the 15-minute timeframe is the best, but it depends on how it works for the specific pair.

Swing Trading: If you want to do swing trading, the 4-hour timeframe is ideal because you don’t have to wait as long as a full day. Additionally, due to the formation of multiple candlesticks, many FVGs (Fair Value Gaps) are created consistently.

Fair Value Gap Trading Strategy

To trade using FVG (Fair Value Gap), you need some knowledge of SMC (Smart Money Concept) because not all FVGs work. It’s better to learn a bit about SMC first, so you should read my article on it. To trade using FVG (Fair Value Gap), first, you need to identify the FVG. You should check if there are 3 candlesticks and if all three have the same color. If they are red, all three should be red; if green, all three should be green. Between these three candles, you need to check that there are no other candlesticks beside the middle one. There can be candles above or below, but there should be nothing next to the middle candle, not even shadows.

When the price re-enters the FVG (Fair Value Gap), you should trade within it. If you are trading with additional SMC (Smart Money Concept) knowledge, it will be better.

Now, let’s understand in detail how to take entry and exit with this trading strategy.

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Entry Formula for Fair Value Gap (FVG)

In this, you need to identify all three candlesticks. All three should be green, and the middle candlestick should have an imbalance.

As soon as the price re-enters the FVG, you will buy.

Formula for entry = 3rd Candlestick Low – 0.01

For the target, subtract the high of the 1st candlestick from the high of the 3rd candlestick. Whatever the result is, that will be the target for the FVG.

Formula for target = 3rd Candlestick High – 1st Candlestick High

For the stop loss, you need to place it slightly below the 1st candlestick to avoid getting swept by liquidity.

When does the Fair Value Gap form?

It’s also important to understand when and why an FVG (Fair Value Gap) forms because having this knowledge will help you grasp the psychology behind FVGs. This understanding will boost your confidence in trading and improve your trading psychology, leading to better overall performance.

The first scenario is when major news events occur. During these times, the market becomes highly volatile, and forming imbalances is a common occurrence.

Also Read:  Inverted Hammer Candlestick Pattern: Downtrend, Top, Uptrend and How to Trade in 2024

When there is a breakout or breakdown, meaning an important price level is breached, there is a higher chance of an FVG (Fair Value Gap) forming.

When an institution engages in large buying or selling, it causes sudden changes in the price, leading the market to move up or down, which creates an FVG (Fair Value Gap).

The Fair Value Gap Indicator

If you want to find FVGs through an indicator, you can use the FVG indicator by Nephew_Sam_. It will help you automatically identify FVGs.

Liquidity Void Meaning in Trading

A liquidity void is created when there is a very sudden movement in the market on either the buying or selling side. This creates an imbalance, which leads to an FVG (Fair Value Gap) being formed. So, that part of the movement is called a liquidity void. Look at this image to understand it better.

Pros and Cons of Fair Value Gaps

FVG (Fair Value Gap) has both pros and cons. In any trading strategy, you will never get 100% certainty. You just need to ensure that you work with the strategy that is more accurate.

Pros:

• Trading with FVG (Fair Value Gap) is easy, and if someone understands FVG well, they can make good profits.
• FVG (Fair Value Gap) forms in all markets, from stocks to forex and cryptos, and it works in all countries’ markets, including the Indian market.
• Identifying FVG (Fair Value Gap) is easy.

Cons:

• Fair Value Gaps (FVGs) can form in different timeframes, and sometimes the FVG you are working with might be rejected by the market in favor of another timeframe. This increases the chance of your stop loss being hit. You will need to work with multiple timeframes, which can be complicated for some traders.
• Sometimes, you might rely solely on FVG (Fair Value Gap) for trading in the market. As mentioned earlier, trading with FVG should be done alongside other factors like Order Block, BoS (Break of Structure), and ChoCh (Change of Character). You may miss out on these factors, so it’s important to keep them in mind.
• FVG (Fair Value Gap) does not fill immediately; it can happen at any time and in various ways. It may not always reach the target after entry; sometimes, it can fill and continue in the same direction.

Also Read:  Tweezer Top Candlestick: How to Trade & Difference Between Strongest & Weakest

Quick Tips About FVG (Fair Value Gap)

• FVG (Fair Value Gap) is a part of SMC (Smart Money Concept).
• FVG (Fair Value Gap) was introduced by ICT (Inner Circle Trader).
• The full form of FVG is Fair Value Gap.
• A void refers to the part of the market where there is a lot of volatility.
• Imbalance occurs when there is a difference between buyers and sellers in the market.
• This is valid in all markets.
• If the FVG (Fair Value Gap) forms in the direction of the trend, it is considered stronger.
• If all three candlesticks are of the same size, they are considered strong.
• In an FVG (Fair Value Gap), all three candlesticks are of the same color.
• If the middle candlestick in an FVG (Fair Value Gap) is long, you will need a larger stop loss.
• FVG (Fair Value Gap) works better when it is formed with a breaker.
• Keep checking different timeframes for FVG (Fair Value Gap).

Conclusion on FVG (Fair Value Gap)

FVG (Fair Value Gap) is a technical-based trading setup that was introduced by ICT (Inner Circle Trader). FVG (Fair Value Gap) is created from an imbalance, so you trade within the FVG. An FVG (Fair Value Gap) is formed by three candlesticks, and you can trade on both sides of it—both short and long positions.

Relying solely on this single trading strategy is not ideal. If you merge it with one or two other strategies, the chances of making a profit increase.

Best of luck to all new traders.

If you have any query regarding this article or need any assistance for your trading journey, contact Conatact Street Investment.