Overview
This lecture covers how to identify fair value gaps (FVGs) in trading, focusing on their structure, purpose, and the correct method for spotting real versus false gaps.
Recap: What Are Fair Value Gaps?
- Fair value gaps (FVGs), also called liquidity voids or imbalances, are price areas with little to no resting orders in the opposite direction.
- Price often retraces into FVGs before reacting or continuing in the main trend direction.
- FVGs help identify retracement entries, not reversals.
Identifying Fair Value Gaps
- FVGs form as a three-candle pattern:
- Candle 1: Start of the move.
- Candle 2: Large move creating an imbalance (body does not overlap Wicks of 1 and 3).
- Candle 3: End of the range.
- For a bullish FVG: measure from top of Candle 1's Wick to bottom of Candle 3's Wick.
- For a bearish FVG: measure from bottom of Candle 1's Wick to top of Candle 3's Wick.
- True FVGs have no Wicks from Candle 1 or 3 overlapping Candle 2's body, showing unfilled liquidity.
Using Fair Value Gaps in Trading
- Confirm market bias (bullish or bearish) before using FVGs for retracement trades.
- Do not assume every FVG will work; only consider trades after seeing price reaction or structure shift within the gap.
- Use lower timeframes to confirm with break of structure or reversal candle before entering.
- Not every gap is valid; ignore those where Wicks from adjacent candles fill the imbalance.
Key Terms & Definitions
- Fair Value Gap (FVG) — A three-candle price pattern showing an area lacking liquidity/opposite resting orders.
- Liquidity Void — A region in the chart with few or no opposite-side orders, often leading to sharp price moves.
- Imbalance — Same as FVG; an area where price moved so quickly no orders filled in the opposite direction.
- Break of Structure — A market signal showing a shift in trend or continuation after a retracement.
Action Items / Next Steps
- On your chosen trading pair, identify 10 fair value gaps (bullish or bearish) and plan a hypothetical trade for each.
- Practice distinguishing real FVGs from false ones where the liquidity void has already been filled.