Fair Value Gap
Last updated
Last updated
Fair Value Gaps (FVGs) refer to imbalances in the price chart where price moves swiftly in one direction without leaving behind overlapping price action in consecutive candles. These gaps indicate areas where there was a lack of trading, often due to a sudden surge in buying or selling pressure.
In simple terms, an FVG is created when the market moves too fast, leaving a gap in the price where buyers and sellers didn't fully exchange orders. Typically, the market aims to "fill" these gaps over time, revisiting these levels to bring balance back to the price action.
Here's a quick breakdown of how FVGs work:
Formation: FVGs form when there’s a strong directional move, often across three consecutive candles (e.g., a large bullish candle without overlapping price from the previous or following candles).
Market Psychology: FVGs often show up when big institutions or high-volume players have stepped in, creating strong, sudden movement.
Purpose in Analysis: Traders look for price to return to these gaps, as they can serve as support or resistance zones where price may react or consolidate. These areas are also seen as potential entry points in trend-following strategies, as they signal areas where liquidity may reside.
Possible Mean Reversion Signals: The indicator now plots red downward triangles after a bullish FVG has been created. These points often act as mean reversion signals, highlighting potential bullish trend exhaustion zones where price may reverse or consolidate before resuming the trend.
This feature is most effective during downtrends, as it helps traders identify areas where bullish momentum is likely to fade before the trend resumes downward.
The Fair Value Gap (FVG) settings allow traders to customize how Fair Value Gaps are identified and displayed on the chart. Here’s a breakdown of each option:
Enable FVG: Turns the Fair Value Gap indicator on or off.
Show Past: Sets the number of historical FVGs to display. This helps in analyzing past price action and understanding how previous gaps influenced the market.
Timeframe: Selects the timeframe for identifying FVGs. You can choose the current chart’s timeframe or set a specific one, which is helpful for multi-timeframe analysis.
FVG Type: Allows selection of specific gap types to display, such as bullish, bearish, or all FVGs. This lets traders focus on gaps in line with their trading strategy.
FVG Threshold: Determines the size of the Fair Value Gaps. A higher threshold may reduce the number of gaps displayed, showing only the most significant ones.
Extension: Adjusts the length of each FVG’s display on the chart, making it easier to see them over extended time periods.
Mitigation Method: Sets the method for identifying when an FVG has been "filled" or mitigated, using either Wicks or Close of the candles. This helps to track when price action has revisited and potentially neutralized a gap.
Hide Overlapped FVG: Hides Fair Value Gaps that overlap with others, reducing clutter and ensuring that only distinct gaps are visible.
These settings provide flexibility in how Fair Value Gaps are displayed, allowing traders to tailor the indicator to fit different trading styles and market conditions.
In essence, Fair Value Gaps represent price imbalances that the market may attempt to correct over time, making them valuable areas for traders seeking potential reversals, continuations, or liquidity entries.
