What is the fair value gap (Fair Value Gap) in price positioning, and how to use it for Forex trading

Common Trader Problems and How to Fix Them

Many Forex traders face the same problem: when the market experiences sharp price changes, finding the right entry point becomes more difficult. This is where the Fair Value Gap (FVG) technical strategy comes into play. This analysis method helps traders read Forex market movements more clearly.

What is a Fair Value Gap?

Fair Value Gap refers to a price gap that appears on the candlestick chart when the Forex price jumps sharply up or down, skipping over a price range with no trading occurring in between.

These gaps often occur in situations such as:

• Market closed until reopening
• Unexpected news announcements
• Low market liquidity

Many traders view Fair Value Gaps as magnets for price, because prices tend to return to fill these gaps later. This creates effective trading opportunities.

Structure and Components of FVG

A Fair Value Gap consists of 3 candlesticks moving in the same direction:

Candlestick 1: The start of the movement
Candlestick 2: Known as “Imbalance” – a candlestick showing market imbalance
Candlestick 3: The end of the movement

The gap between candlesticks 1 and 3 is the true Fair Value Gap. This imbalance results from large trades in one direction, causing the price to skip over a range without restoring balance.

When Does a Fair Value Gap Occur?

Sudden News and Events

When unexpected news comes out, such as central bank announcements or economic data exceeding expectations, the market reacts quickly, causing the price to spike or drop immediately, creating a gap on the chart.

Market Openings and Closings

These gaps are often seen at the beginning of the week ( on Monday open ) or after market close on Friday, because the market was closed. When it reopens, the price may differ from the previous close.

Large Institutional Trading

When institutional investors, such as hedge funds, place large buy or sell orders, the price can move rapidly beyond expectations, creating a price gap.

Types of Fair Value Gaps

Type 1: Bearish FVG (Bearish FVG)

Formed by three consecutive red candlesticks (price down ). This gap indicates that the downtrend may continue.

How to read the chart:

• The lowest point of the first candlestick = top of the FVG
• The highest point of the third candlestick = bottom of the FVG
• When the price moves up into this zone, it’s often a good selling point

Type 2: Bullish FVG (Bullish FVG)

Formed by three consecutive green candlesticks (price up ). This gap suggests that the uptrend remains strong.

How to read the chart:

• The highest point of the first candlestick = bottom of the FVG
• The lowest point of the third candlestick = top of the FVG
• When the price moves down into this zone, it’s often a good buying point

Advantages of Using the Fair Value Gap Technique

Clear profit opportunities: Fair Value Gaps provide high-probability entry and exit points because prices tend to respond to these zones.

Applicable across all timeframes: Whether on minute, hourly, or daily charts, Fair Value Gaps can be identified.

Simple concept: FVG is easy to understand; even beginners can learn and apply it quickly.

Highly flexible: This technique works with various assets, stocks, and digital currencies, not just Forex.

Limitations of Using Fair Value Gaps

Not 100% guaranteed signals: Prices may not always return to fill the gap, so it should be used with other analysis methods.

Requires market confirmation: Relying solely on Fair Value Gaps is insufficient; wait for confirmation signals before trading.

Same risks as any trading: Always manage risk and set stop-loss orders.

How to Trade Using Fair Value Gaps in Simple Steps

Step 1: Identify the main trend direction

First, look at higher timeframes, such as daily or weekly charts, to determine the market’s overall movement:

• If the price makes higher lows and higher highs = uptrend → buy
• If the price makes lower highs and lower lows = downtrend → sell

Step 2: Identify corresponding Fair Value Gap zones

Once the trend is known, look for Fair Value Gaps aligned with that trend:

• In an uptrend → find bullish FVGs
• In a downtrend → find bearish FVGs

Step 3: Set stop-loss and take-profit levels

This is the most important part:

• Stop-loss: Place outside the Fair Value Gap zone to protect your capital
• Take-profit: Set at the next Fair Value Gap zone in the trading direction

Tips to Make Fair Value Gap Trading More Effective

Use multiple indicators: Don’t rely solely on Fair Value Gaps; combine with other indicators like Moving Averages or RSI for increased accuracy.

Set reasonable stop-loss levels: Risk management is key to sustainable trading.

Wait for market confirmation: Before entering, wait for the price to touch the Fair Value Gap zone and see confirmation signals such as candlestick patterns or engulfing formations.

Time your entries correctly: Patience and waiting for the right moment can increase your chances of success.

Pay attention to market liquidity: Avoid trading Fair Value Gaps during low liquidity periods, such as after earnings reports or major news releases, as prices may be unstable.

Summary

Fair Value Gap is a valuable analysis tool in Forex trading, helping you understand and interpret price movements more clearly. However, it’s crucial to use it alongside other analysis methods. This technique is not an automatic profit formula but part of a comprehensive trading strategy. Consistent practice and good risk management are essential for achieving success.