Fair Value Gap (FVG) Explained: 3 Best Strategies Revealed

Summary

This video delves into the powerful concept of fair value gaps in trading, highlighting how many traders misuse them, leading to losses. It explains how to identify high-probability gaps through key characteristics such as size, positioning, and avoidance of key levels. The video also offers advanced trading strategies that combine fair value gaps with inversion techniques, Fibonacci retracement, and multi-timeframe confirmation. Viewers are encouraged to utilize a recommended trading platform, Simple Effects, to effectively execute these strategies. Overall, mastering fair value gaps can significantly enhance trading success.

Takeaways

• 📊 Fair value gaps (FVGs) are created when price moves sharply, leaving a gap on the chart.
• 🔍 To identify an FVG, look for a three-candle sequence where the first and third candle do not overlap with the second.
• 🚫 Not all FVGs are effective; they must be untested (unmitigated) to have a high chance of success.
• 📏 Larger FVGs are more likely to be profitable due to stronger buyer-seller imbalances.
• 📉 Focus on FVGs located in the lower part of upward moves or the upper part of downward moves for better results.
• ⚠️ Avoid trading FVGs that are near major support or resistance levels to prevent invalidation.
• 🔄 FVGs that form after a break of structure (new highs/lows) have higher win rates.
• 🎯 The best entry point for an FVG is the midpoint of the gap after a price retracement.
• 📈 Advanced strategies include using inversion gaps, Fibonacci confluence, and multi-timeframe confirmation for better trades.
• 💰 SimpleFX is recommended as a trading platform, offering a variety of assets and features to support trading strategies.

Q & A

What is a fair value gap in trading?

A fair value gap is a formation on a chart where price moves sharply in one direction, creating a gap between two smaller candles. This gap often attracts price back towards it, allowing traders to potentially profit as price retests and bounces off the gap.

How can traders identify a fair value gap?

To identify a fair value gap, traders need to spot a three-candle sequence: two smaller candles with a large candle in between. The gap exists when the high of the first candle and the low of the third candle do not overlap with the middle candle.

Why are some fair value gaps considered more effective than others?

Not all fair value gaps are equal; some remain untested or 'unmitigated', which indicates they have a higher chance of success. If a gap has been retested or if the price closes below it, its effectiveness decreases.

What is the significance of the size of a fair value gap?

Larger fair value gaps tend to be more effective than smaller ones because they represent a stronger imbalance between buyers and sellers, making them more likely to serve as significant support or resistance levels.

What are the key considerations when multiple fair value gaps are present?

When multiple fair value gaps exist, traders should focus on those located in the lower portion of the price movement for long positions, or the upper portion for short positions, using tools like the Gann box to filter effectively.

What is a break of structure and why is it important in trading fair value gaps?

A break of structure occurs when price breaks above a previous high in an uptrend or below a previous low in a downtrend. Fair value gaps that form near a break of structure often have a higher win rate, indicating strong potential for profit.

What is the best entry technique for trading a fair value gap?

The best entry technique involves entering at the midpoint of the fair value gap once the price retraces to it, while setting a stop loss at the break of the gap or point of invalidation.

What is an inversion gap and how is it traded?

An inversion gap is a previously broken fair value gap that can still be utilized. Traders wait for a retracement back towards this gap, which now acts as resistance, and then enter a trade in the opposite direction of the original gap.

How can Fibonacci retracement be combined with fair value gaps?

Traders can apply the Fibonacci retracement tool to find potential support or resistance levels. Focusing on the fair value gap closest to the 61.8% Fibonacci level can enhance entry points for trades, especially when the price retraces to that gap.

What role does multi-timeframe analysis play in trading fair value gaps?

Multi-timeframe analysis helps confirm the direction of trades. By identifying trends on a higher timeframe (like the 4-hour chart) and using indicators like the MACD on a smaller timeframe (like the 1-hour chart), traders can increase the reliability of their entries.