Overview
This lecture explains fair value gaps (FVGs), imbalances, and inverse fair value gaps in trading: how to identify them, when to use them, and their role in market order flow.
What Is a Fair Value Gap (FVG)?
- A fair value gap (FVG) is a three-candlestick pattern showing a price range lacking buy or sell orders.
- In a bullish FVG, the gap is between the top wick of the first candle and the bottom wick of the third candle, indicating a lack of sell orders.
- In a bearish FVG, the gap is between the bottom wick of the first candle and the top wick of the third, showing a lack of buy orders.
- The color of the first and third candles does not matter; only the direction of the middle candle is relevant.
- If the wicks of the first and third candles overlap, there is no fair value gap.
Identifying and Using FVGs on Charts
- FVGs are visible as gaps between non-overlapping wicks in three-candle patterns.
- Both large and small FVGs can impact price; size does not determine validity.
- After identifying FVGs, wait for price to retrace into the gap and confirm reactions (buy/sell) before considering trades.
- FVGs are continuation confluences, helping confirm ongoing trends during retracements.
Confluence and Market Structure
- Do not trade solely on FVGs; additional confluences like liquidity sweeps, break of structure, order flow, and daily bias are needed.
- Optimal FVG trades occur early in new order flow (trend), ideally after a liquidity sweep and break of structure.
- FVG setups are best when combined with other confirmations in the trend direction.
Inverse Fair Value Gaps (iFVGs)
- An inverse FVG occurs when price closes through (disrespects) an FVG instead of reacting to it.
- Inverse FVGs act as confirmation confluences and can indicate potential trend reversals, similar to a break of structure.
- Within stacked gaps, the outermost (last-formed in the leg) FVG must be violated for an iFVG signal.
Balanced Price Action and Relevance of FVGs
- Once a swing high (uptrend) or swing low (downtrend) is broken, any FVGs or confluences below (uptrend) or above (downtrend) the broken level become irrelevant.
- Only consider FVGs within the current leg of price movement; ignore older gaps after a new high/low is made and price has balanced past them.
Key Terms & Definitions
- Fair Value Gap (FVG) — A three-candle price range with a lack of buy/sell orders causing market imbalance.
- Imbalance — A price area lacking buy or sell orders, often shown as a gap between wicks.
- Inverse FVG (iFVG) — When price closes through an FVG, signaling a potential reversal or trend change.
- Liquidity Sweep — Price movement that takes out previous highs/lows to collect stop orders.
- Break of Structure (BoS) — A move that breaks previous market highs/lows, indicating a trend shift.
- Order Flow — The general direction and strength of buying and selling in the market.
Action Items / Next Steps
- Practice identifying bullish and bearish FVGs on historical charts.
- Watch recommended videos on liquidity sweeps and daily bias for deeper understanding.
- Combine FVG identification with other confluences (order flow, breaks of structure) before trading.
- Review this material before attempting live trades.