In the realm of forex trading, technical analysis is a cornerstone for making informed decisions. One of the lesser-known but highly effective concepts is the Fair Value Gap (FVG). This article will delve into what FVG is, how it manifests in both bullish and bearish scenarios, and how traders can utilize it to enhance their trading strategies. We’ll also introduce a free indicator to help you identify FVGs on your charts.
What is a Fair Value Gap (FVG)?
A Fair Value Gap (FVG) occurs when there is a discontinuity or gap between the prices at which a currency pair has traded over a specific period. This gap signifies a disparity between supply and demand, creating a vacuum that the market often moves to fill. In essence, FVGs represent areas where the price hasn't covered certain levels, indicating a potential imbalance that could attract market participants to close this gap.
Bullish Fair Value Gap
In a bullish scenario, an FVG forms when the low of a new candle does not cover the high of the two previous candles. This results in a short candle in the middle, creating the fair value gap. Here's how it looks in practice:
Candle 1: The first candle sets a high point.
Candle 2: The second candle forms, creating the middle candle.
Candle 3: The third candle’s low does not overlap with the high of the first candle.
This gap between the low of the third candle and the high of the first candle is the bullish FVG. It indicates a potential area of support where traders might look for buying opportunities.
Bearish Fair Value Gap
Conversely, in a bearish scenario, an FVG forms when the high of a new candle does not cover the low of the two previous candles. This creates a short candle in the middle, forming the fair value gap. Here’s the breakdown:
Candle 1: The first candle sets a low point.
Candle 2: The second candle forms, becoming the middle candle.
Candle 3: The third candle’s high does not overlap with the low of the first candle.
This gap between the high of the third candle and the low of the first candle is the bearish FVG. It indicates a potential area of resistance where traders might look for selling opportunities.
Trading Using Fair Value Gaps
Traders can capitalize on FVGs by identifying these gaps and using them as potential entry points. The middle of the FVG zone often serves as an optimal level for retracement, providing a strategic point for placing buy or sell orders.
Bullish FVG Trading Strategy: When a bullish FVG is identified, traders can set a buy limit order at the middle of the FVG zone. This allows for entering a long position at a potentially lower price point, anticipating that the gap will be filled and the price will rise.
Bearish FVG Trading Strategy: Conversely, when a bearish FVG is spotted, traders can set a sell limit order at the middle of the FVG zone. This allows for entering a short position at a potentially higher price point, anticipating that the gap will be filled and the price will fall.
Utilizing FVG Indicator for MetaTrader 5
To assist traders in identifying Fair Value Gaps on their charts, we have developed a free indicator available for MetaTrader 5. This tool automatically highlights FVG zones, simplifying the process of spotting potential trading opportunities. You can download this indicator for free and integrate it into your trading strategy to enhance your market analysis.
Download the free FVG indicator for MetaTrader 5
