Fair Value Gap in the Forex Market: Learn the Techniques That Help Beginner Traders

What is a Fair Value Gap and Why Is It Important for Traders

In Forex trading, investors often face issues caused by unpredictable price volatility. However, the Fair Value Gap (FVG) technique can help address this problem by providing clear entry points into the market.

Fair Value Gap refers to a price gap that occurs when the price moves rapidly and skips over a certain price range without any trading activity. Many traders see the fair value gap as a magnet that attracts the price back to fill it, creating tangible profit opportunities.

When Does a Fair Value Gap Occur in the Market?

This gap appears in several situations:

Unexpected News Events - When economic data releases differ from expectations, such as corporate earnings, interest rates, or unemployment figures, the price may jump in one direction.

Large Institutional Trades - When funds or large banks execute massive trades, the imbalance of supply and demand causes the price to spike up or down.

Market Openings and Closings - During periods of low liquidity, prices are at risk of jumping over certain price ranges.

Weekend Gaps - FVGs often occur between Friday’s close and Monday’s open due to news events outside trading hours.

Structure and Components of a Fair Value Gap

FVG consists of 3 candlesticks:

First Candle - The candle that begins moving in one direction.

Second Candle - Known as the Imbalance; this candle shows the gap that has formed (the gap that occurs).

Third Candle - The candle that closes the gap or continues the movement.

The gap occurs between the wicks (wick) of the first and third candles, with the second candle situated within this gap.

Types of FVG: Uptrend and Downtrend

Bearish Gap (FVG Down)

• Composed of three red candles
• The first has a low point (at the top of the FVG)
• The third has a high point (at the bottom of the FVG)
• Indicates a potential continuation of a downtrend

Bullish Gap (FVG Up)

• Composed of three green candles
• The first has a high point (at the bottom of the FVG)
• The third has a low point (at the top of the FVG)
• Suggests a possible continuation of an uptrend

Good Information and Precautions

Strengths:

• Additional profit opportunities when the price returns to fill the gap
• Usable across all timeframes (minutes, hours, days, weeks)
• Easy concept to learn and apply
• Can be adapted to various markets (stocks, commodities, crypto)

Weaknesses:

• Price does not always return to fill the gap
• Should be used with other analysis tools for accuracy
• Carries risks similar to all trading strategies

How to Trade Using FVG in Simple Steps

Step 1: Study the Overall Trend

Observe how the market is moving. If the price creates higher lows, you are in an uptrend; prepare to buy. If it creates lower highs and lows, you are in a downtrend; prepare to sell.

Step 2: Identify Support and Resistance Areas

Once the trend is known, look for FVGs that align with that trend. In an uptrend, focus on support levels with strong buying interest. In a downtrend, look for resistance levels with strong selling interest.

Step 3: Set Stop-Loss and Take-Profit Points

To protect your capital, place stop-loss orders outside the FVG area. Set take-profit levels at the next support or resistance levels.

Tips to Improve Trading Effectiveness

Combine Multiple Indicators - Don’t rely solely on FVG; use it alongside other technical indicators to increase confidence.

Use Stop-Loss Orders - Always set stop-losses to limit losses and preserve capital for future trades.

Wait for Market Confirmation - Don’t enter immediately upon seeing an FVG; wait for price action that confirms the gap’s direction, such as engulfing patterns on lower timeframes.

Consider Timing - Entry timing is crucial. Enter during moments with clear confirmation. Patience can improve results.

Be Aware of Liquidity - If the gap is near the previous day’s high/low, wait for liquidity confirmation before entering. This makes your entry points more reliable.

Summary

Fair Value Gap is a valuable tool for Forex traders to identify trading opportunities. However, it should be used in conjunction with other analysis methods to reduce risk. Understanding fair value gaps adds an important tool to your trading skill set. Practice consistently and wait for market confirmation to use this technique effectively.