FVG is a price analysis tool that beginner traders need to know.

FVG is one of the price analysis techniques gaining increasing attention in the forex trading community because it helps solve a key problem most traders face: finding suitable entry and exit points during highly volatile market conditions. This tool not only identifies opportunities but also provides deep insights into market behavior.

What is FVG and How Does It Relate to Price?

Fair Value Gap, or FVG for short, is an area on the price chart created by rapid and clear price movements. When the market changes suddenly due to major news events or large institutional trades, the price jumps across a range without any trading occurring within that range. This remaining gap is called an FVG.

Traders see FVG as a magnet that attracts the price back because markets tend to “fill” these gaps in the future. Filling the FVG is a significant signal that helps traders anticipate price movements and determine clearer entry and exit points.

Why is FVG Important for Traders and Markets?

The importance of FVG lies in revealing market imbalance. When many traders place buy or sell orders in the same direction over a short period, it creates a gap between the first and third candlesticks. The middle candlestick (called Imbalance) indicates that demand and supply are out of sync, signaling the presence of an FVG.

Additionally, FVG provides insights into sudden market changes, often related to major structural shifts. Identifying FVG helps traders plan risk management strategies and set profit targets more effectively.

Structure and Mechanism of FVG on the Chart

FVG consists of three candlesticks, each playing a crucial role:

First candlestick: Marks the start of the trend and defines one boundary of the FVG.

Second candlestick (Imbalance): The most important, showing market imbalance and indicating a disparity between demand and supply.

Third candlestick: Defines the end of the FVG boundary and clarifies the price gap.

The gap between the high of the first candlestick and the low of the third candlestick is the FVG. This gap often becomes a point where the price revisits later, presenting a trading opportunity.

Types of FVG and How to Identify Them

FVG mainly has two types based on trend direction:

Bearish FVG

Consists of three consecutive red candles, with the second being a clear Imbalance. The price tends to return to fill the gap in the upper area. This indicates a continuing downtrend.

How to read: The low of the first candle marks the upper boundary; the high of the third candle marks the lower boundary of the FVG.

Bullish FVG

Consists of three green candles in a row, with the price moving down to fill the gap in the lower area. This suggests a strong uptrend.

How to read: The high of the first candle marks the lower boundary; the low of the third candle marks the upper boundary of the FVG.

When Are FVGs Most Likely to Occur?

Several situations make FVG formation more likely:

Major news events: Economic data releases (like interest rates, unemployment figures) that surprise the market often cause rapid price jumps.

Large institutional trades: When hedge funds or banks buy or sell large volumes, their trading power can push prices across ranges without trades within that range.

Market open/close periods: During low liquidity times (market open or close), buying or selling pressure may cause more pronounced price movements.

Weekend gaps: FVGs often occur between Friday close and Monday open, when news or events outside trading hours cause sharp price adjustments.

Advantages and Limitations of Using FVG in Trading

Advantages

Clear profit opportunities: FVG provides meaningful entry and exit points, enabling effective position management.

Applicable across all timeframes: Whether trading minutes, hours, or daily charts, FVG can be identified.

Easy to learn: The concept is straightforward, making it accessible even for beginners.

Works across various assets: Not limited to forex; applicable to stocks, commodities, and cryptocurrencies.

Limitations

Not 100% accurate signals: Prices may not always return to fill the gap; some gaps remain unfilled or are filled differently than expected.

Should be combined with other tools: Relying solely on FVG can be risky; it’s best to use with indicators or other analysis techniques.

Risk management required: Like all trading methods, FVG involves risks. Losses can occur if the market moves against expectations.

Three-Step FVG Trading Strategy

Step 1: Determine Market Trend

Before identifying an FVG, understand the market sentiment. If higher lows and higher highs are forming, it’s an uptrend. Look for Bullish FVG to buy. Conversely, if lower highs and lower lows appear, it’s a downtrend; look for Bearish FVG to sell.

Tip: If unsure, switch to higher timeframes (e.g., 4-hour or daily) for a clearer view.

Step 2: Identify Support and Resistance Zones

Once the trend is clear, find key support and resistance areas.

• In an uptrend, focus on support zones where traders are expanding buy positions; these areas are likely to attract and halt price declines.

• In a downtrend, focus on resistance zones where strong selling occurs.

Step 3: Set Stop Loss and Profit Targets

Risk management is crucial. When entering a buy from support in an uptrend, place a stop loss slightly below the support zone, typically 10-20 points depending on volatility.

Set profit targets at the next resistance level or use a risk-reward ratio of at least 1:2 or 1:3.

Tips to Improve FVG Trading Effectiveness

Use multiple indicators: Don’t rely solely on FVG. Confirm signals with tools like Moving Averages, RSI, or Bollinger Bands.

Wait for confirmation: Before entering, wait for the price to move into the FVG and show confirming signals, such as bullish or bearish candles, rather than acting solely on the gap.

Time your entries well: Patience and proper timing are key. Don’t rush into trades; wait for price action to reinforce your decision.

Pay attention to liquidity: If the gap is near previous high or low points, ensure sufficient liquidity. Waiting for liquidity to enter can improve trade execution.

Strict risk management: Always use stop-loss orders. Never risk more than 2-3% of your capital per trade.

Common Mistakes When Trading FVG

Mistake 1: Using FVG alone without additional analysis, as it’s not a foolproof signal.

Mistake 2: Entering trades too early before clear reversal signals appear.

Mistake 3: Not setting stop-losses, risking large losses if the market moves against you.

Mistake 4: Forcing trades based solely on the presence of an FVG without confirming market conditions; always wait for confirmation.

Summary

FVG is a valuable price analysis tool for both novice and experienced forex traders. Understanding that FVG represents an imbalance area on the chart, and knowing how to identify and trade based on these signals, can enhance profit opportunities.

However, it’s essential to practice caution, implement strict risk management, and incorporate other tools into your strategy. Trading requires patience, discipline, and continuous learning. As you gain experience and better understand FVG, you’ll see that knowing what FVG is gives you a significant advantage in the forex trading market.

Don’t overlook this! Before trading live, practice on demo accounts and grow gradually as your confidence builds. Trading involves risks and may not be suitable for everyone.