FVG Trading Strategy Explained (Fair Value Gaps)

Summary

This video provides a comprehensive guide to trading Fair Value Gaps (FVGs) with seven actionable tips. It explains how bullish and bearish FVGs form, highlighting their role as market imbalances that attract price for rebalancing before continuing a trend. Key strategies include aligning FVGs with market order flow, avoiding gaps that have been touched, targeting discount or premium zones, using multi-timeframe confluence for precise entries, evaluating the third candle, trading around liquidity areas, and avoiding consolidation periods. By following these guidelines, traders can identify high-probability setups and improve their chances of trading successfully within trending markets.

Takeaways

• 😀 Fair Value Gaps (FEGs) are a useful tool for traders, but understanding what makes a valid FEG is essential for using them effectively.
• 😀 A bullish FEG occurs when there is a gap between the top wick of the first candle and the bottom wick of the third candle, creating a bullish imbalance.
• 😀 A bearish FEG happens when the gap is to the downside, signaling a bearish imbalance. Price will often return to this gap before continuing the trend.
• 😀 Only use FEGs that align with the current market order flow, meaning use bullish FEGs in uptrends and bearish FEGs in downtrends for better trade setups.
• 😀 Avoid using FEGs that have already been touched by price action as they become weaker and less reliable for future trades.
• 😀 Target FEGs within the discounted area during uptrends for stronger trade setups, and target FEGs within the premium area during downtrends.
• 😀 Combine FEGs from different timeframes for more precise entries. Use smaller timeframes to refine the entry within a larger FEG on a higher timeframe.
• 😀 Pay attention to the third candle in an FEG. If it is a bullish candle, it is a strong breakaway gap; if it's a bearish candle, it could indicate a rejection and should be avoided.
• 😀 FEGs that form around liquidity areas (e.g., previous swing highs or lows) can offer the strongest support and resistance levels.
• 😀 Avoid trading FEGs during consolidation periods. Focus on trending markets where FEGs are respected, signaling trend continuation or reversal.

Q & A

What is a Fair Value Gap (FEG) in trading?

A Fair Value Gap (FEG) occurs when there is a space between the first candle's top wick and the third candle's bottom wick in a series of three bullish or bearish candles. This creates an imbalance where only one side (buyers or sellers) is involved in the price movement, making it a potential area for price to return to for rebalancing.

Why is a Fair Value Gap considered an imbalance?

A Fair Value Gap is considered an imbalance because it results from a strong move involving only one side (buyers or sellers). The chart typically requires both buyers and sellers to maintain balance. When one side dominates, it creates an imbalance, which price may later revisit to rebalance before continuing in the same direction.

What should you look for in a bullish FEG?

In a bullish FEG, you should look for a gap between the first and third candles’ wicks that forms after an impulsive bullish move. The price will likely revisit this area as it acts as a support zone before continuing the upward trend.

What is the difference between a bullish and bearish FEG?

A bullish FEG occurs when there is a gap that favors buyers (price moves upward with no sellers), while a bearish FEG occurs when the gap favors sellers (price moves downward with no buyers). Bullish FEGs are used for long trades, and bearish FEGs are used for short trades.

Why should you avoid using FEGs that have already been touched?

FEGs that have already been touched or mitigated are considered weaker because the imbalance has been partially or fully rebalanced. While not every touched FEG will fail, it's generally better to target FEGs that have not been touched yet to maintain higher trade quality.

How can you identify the best FEGs to trade?

The best FEGs to trade are those that align with the overall market trend (order flow), are within a discounted area for bullish trades or a premium area for bearish trades, and have not been previously touched. Additionally, targeting FEGs that form within higher-timeframe trends or liquidity areas increases their effectiveness.

What is the significance of the 50% midlevel in FEG trading?

The 50% midlevel of a price move marks the division between the premium and discount areas. For long trades, FEGs formed in the discount area (below 50%) are stronger, while for short trades, FEGs formed in the premium area (above 50%) are stronger.

How do different timeframes affect FEG trading?

Traders can combine FEGs from different timeframes to increase precision. For example, if a larger FEG is identified on a higher timeframe, you can zoom into a lower timeframe (e.g., 15-minute chart) to find a smaller, more precise FEG within the larger one, increasing the likelihood of a successful trade.

Why is the third candle of an FEG important in trading?

The third candle in an FEG is crucial because it shows whether the gap will likely hold or fail. If the third candle continues the move strongly (a breakaway gap), the FEG is stronger and more likely to provide a good trade setup. If the third candle shows weakness or rejection (e.g., a bearish candle after a bullish move), the FEG is weaker and may fail.

What is the difference between a liquidity run and a liquidity sweep in FEG trading?

A liquidity run occurs when price blasts through a previous swing high or low, signaling strong continuation of the trend. A liquidity sweep happens when price fails to break through a previous swing high or low, suggesting a potential trend reversal. FEGs formed after a liquidity run are stronger and more reliable than those formed after a liquidity sweep.