What is FVG in Trading
What is FVG in Trading?
FVG stands for Fair Value Gap, a concept that refers to the space or gap between price movements in a market where an asset’s price does not reflect its true or "fair" value. These gaps appear when the price of an asset moves too quickly, often due to significant news, events, or high volatility.
When these gaps occur, the price is not able to catch up with the market’s true equilibrium, and this results in a market inefficiency that can be identified and used by traders. FVGs are often seen as opportunities for market correction, where the price moves back to fill the gap, giving traders the chance to enter or exit trades at advantageous levels.
Key Features of FVG:
| Feature | Description |
|---|---|
| Market Inefficiency | FVGs occur due to price moving too quickly, creating gaps that need filling. |
| Identifiable on Charts | Traders can spot FVGs using technical analysis tools on candlestick charts. |
| Opportunity for Entry | Gaps often create opportunities for traders to enter or exit trades. |
| Often Temporary | FVGs are usually filled over time as the price returns to fair value. |
How Does FVG Work in Trading?
FVG in trading works on the principle of price correction. When a gap appears in the market, the price action typically moves to fill this gap. Traders recognize this as an opportunity, as the price will often return to the "fair" value before continuing its trend.
Example of How FVG Works:
Let’s consider an example to illustrate what is FVG in trading.
Imagine a currency pair, EUR/USD, has been trading steadily between 1.2000 and 1.2050. However, after a major economic announcement, the price jumps from 1.2000 to 1.2150, creating a gap. This rapid movement does not reflect the true market value, creating a Fair Value Gap (FVG).
Traders can anticipate that the price will eventually return to the 1.2000-1.2050 range to fill the gap before continuing its upward trajectory.
This concept allows traders to plan their trades, knowing that the market will often correct itself by filling the gap before continuing its trend.
Identifying FVG on a Trading Chart
Identifying FVG on a chart is straightforward once you understand the concept. Traders use candlestick patterns and technical indicators to spot areas where the price has moved quickly and created gaps.
- Look for Sudden Price Jumps: A significant increase or decrease in price over a short period of time creates an FVG.
- Check for Low Volume: When the price moves too quickly, it often happens with low trading volume, signaling a gap.
- Use Technical Indicators: Tools like moving averages or Bollinger Bands can help spot the price levels where the gap might occur.
Types of FVG:
| Type | Description |
|---|---|
| Bullish FVG | A gap that occurs after a significant upward price movement. Traders expect the price to fill the gap by moving lower before continuing upward. |
| Bearish FVG | A gap that occurs after a significant downward price movement. Traders expect the price to fill the gap by moving higher before continuing downward. |
How to Use FVG in Trading?
Now that we have covered what is FVG in trading, let’s dive into how traders can use these gaps to improve their trading strategies.
1. Filling the Gap Strategy
The most common strategy for trading FVG is to wait for the market to fill the gap. This involves entering a trade in the direction that the market is likely to move to fill the gap, and then exiting when the gap is closed.
- Bullish Example: If a gap occurs after a strong sell-off, traders might look to buy as the market returns to fill the gap, anticipating a continuation of the uptrend after the correction.
- Bearish Example: If a gap occurs after a strong rally, traders may look to sell when the price retraces to fill the gap, expecting the downtrend to continue afterward.
2. Risk Management with FVG
Using what is FVG in trading also involves managing your risk effectively. Since FVGs can often lead to short-term price corrections, it is important to set proper stop-loss orders to protect against unexpected market movements.
3. Trend Confirmation
Traders can use FVG as a tool to confirm trends. If a gap is filled in a market that is in a strong uptrend, it often signals that the uptrend will continue. Conversely, in a downtrend, filling a gap can be seen as a sign that the price will continue lower after filling the gap.
Conclusion
What is FVG in trading is a crucial concept for traders who wish to improve their technical analysis and trading strategies. By understanding the concept of Fair Value Gaps, traders can take advantage of price inefficiencies and potentially increase their profitability.
Using tools to identify and trade these gaps, coupled with sound risk management strategies, will allow traders to capitalize on the market’s natural corrections. Exness provides a robust trading platform with all the necessary tools to implement strategies based on FVG.
FAQ
- What is an FVG in trading?
- FVG stands for Fair Value Gap, a price inefficiency that occurs when the market moves too quickly and creates a gap.
- How do I identify an FVG on a chart?
- Look for rapid price movements on a candlestick chart that create a gap between price levels.
- How can I trade using FVG?
- Traders often wait for the gap to fill, buying or selling in the direction of the market correction.
- Are FVGs common in trading?
- Yes, FVGs are common, especially in volatile markets or following major news events.
- How can I manage risk when trading FVGs?
- Set stop-loss orders and avoid overleveraging to protect your capital when trading FVGs.