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FVG in Trading: Understanding Fair Value Gap

The document discusses the fair value gap (FVG) in financial trading. It defines FVG as the difference between an asset's current value and its fair value due to market inefficiency. It provides two methods for identifying FVG - fundamental analysis and technical analysis, focusing on the latter. It outlines criteria for determining FVG through technical analysis like identifying large candlesticks. It also describes two types of FVG - undervalued and overrated.

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dhruvika gupta
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2K views2 pages

FVG in Trading: Understanding Fair Value Gap

The document discusses the fair value gap (FVG) in financial trading. It defines FVG as the difference between an asset's current value and its fair value due to market inefficiency. It provides two methods for identifying FVG - fundamental analysis and technical analysis, focusing on the latter. It outlines criteria for determining FVG through technical analysis like identifying large candlesticks. It also describes two types of FVG - undervalued and overrated.

Uploaded by

dhruvika gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

FVG in Trading: A Complete Guide to Fair Value Gap - ForexBee

Rally Base Drop: A Forex Trading Strategy - ForexBee

FVG in Trading: A Complete Guide to


Fair Value Gap
FVG in trading means the fair value gap, which refers to the difference between
the current value of an asset or currency and its fair value due to inefficiency or
imbalance in the market.

Fair value gap is the most important term in price action trading that a trader
should understand. There are many uses and benefits of fair value gaps in
trading. It can also be used as a target or trade entry level.

I will explain the fair value gap in detail with a trading strategy in this article, so
read the complete article.

How to identify the fair value gap?


There are two ways to identify the fair value gap in trading the financial market.

The first is by fundamental analysis, such as market inefficiencies, information


asymmetry, or irrational behavior by market participants.

The second method is to determine the FVG by technical analysis, such as


analyzing the candlesticks to determine the imbalance.

I will explain the second method as we focus only on price action and technical
analysis.

To determine the FVG in technical analysis, follow the following criteria:

 Find a huge-size candlestick with a 70% body-to-wick ratio. You should


compare the candlestick size with the last 20 to 40 candlesticks.
 Now analyze the neighboring candlesticks. Both neighboring candlesticks
should not overlap the big candlestick. A minor overlap can happen on the
upper and lower side of the big candlestick.
 The price area between the previous candlestick’s low and the next
candlestick’s high will act as the fair value gap or FVG.
Types of fair value gaps
Based on fair value difference, the FVG is categorized into two types

1. Undervalued FVG
2. Overrated FVG

Undervalue FVG: it means that the price of a currency or financial asset is


lower than its fair value. In this case, a price will increase in the future to balance
this inefficiency. In technical analysis, a big bearish candlestick will show the FVG

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