Fair Value Gaps (FVGs) are essential components of the Inner Circle Trader (ICT) methodology, representing imbalances in price action.
These gaps occur when the market moves sharply in one direction, creating a price range that hasn’t been fully traded.
In ICT, FVGs are seen as price inefficiencies that the market is likely to revisit in the future, offering traders significant opportunities for high-probability trades.
1. What Are Fair Value Gaps (FVGs) in ICT?
An FVG is the gap between the high or low of a previous candle and the corresponding low or high of the next candle.
It forms when price moves too quickly, leaving untested areas where no buyers or sellers were able to trade.
In a normal, efficient market, price action tends to balance out over time, meaning these gaps are likely to be filled as the market returns to those untested areas.
For example:
- In a bullish market, an FVG forms when price spikes upward quickly, leaving a gap between a candle’s low and the high of the previous candle.
- In a bearish market, the reverse occurs when price drops quickly, creating a gap between a candle’s high and the low of the previous one.
FVGs are key zones that the market will often retrace to as part of the price rebalancing process.
2. Why Are Fair Value Gaps Significant in Price Rebalancing in ICT?
The core principle of ICT is understanding how institutional traders, also known as smart money, control the market.
Institutions tend to leave footprints in the market through FVGs because their large orders cause price to move rapidly.
Since these zones are inefficient, meaning that price didn’t fully interact with enough liquidity, the market seeks to rebalance by returning to these levels.
This rebalancing happens because, in an efficient market, price will move between buyers and sellers to fill in gaps and create a more stable flow of liquidity.
These retracements to FVGs provide traders with opportunities to join the institutional order flow.
3. Types of Fair Value Gaps in ICT
1. Bullish Fair Value Gap:
Occurs in an upward move, creating a gap between the high of one candle and the low of the next.
Price is likely to return to this zone before coBearish Fair Value Gap: ntinuing its bullish trend.
2. Bearish Fair Value Gap:
Occurs in a downward move, creating a gap between the low of one candle and the high of the next.
The market typically retraces to this area before continuing lower.
4. How to Use Fair Value Gaps in Trading in ICT
FVGs serve as critical levels for entering trades, setting stop-losses, and determining potential profit targets.
Here’s how you can effectively use them in your trading strategy:
1. Identifying Fair Value Gaps
To identify an FVG, you look for a sharp price movement where there is a visible gap between two candles.
In a bullish market, the gap would be between the low of one candle and the high of the next.
In a bearish market, the gap would be between the high of one candle and the low of the next.
Example:
On a 1-hour chart of EUR/USD, if there is a sharp move up from 1.1000 to 1.1050, creating a gap between the low of one candle at 1.1020 and the high of the next candle at 1.1030, this is a bullish fair value gap.
Price may retrace to this level before continuing higher.
2. Trading the Retracement
Once an FVG is identified, you wait for the market to retrace to the gap.
This retracement often offers a high-probability entry point as the market “fills the gap” left by the impulsive move.
The idea is that institutions left unfilled orders in this area, and the market is likely to revisit it to fill those orders.
Example:
In the bullish FVG from the previous example, the price may retrace from 1.1050 down to the 1.1020-1.1030 area before resuming the uptrend.
Traders can place buy orders around the FVG level, anticipating that price will continue upward once the gap is filled.
3. Setting Stop-Loss and Take-Profit Levels
When trading FVGs, it’s crucial to place your stop-loss below or above the gap, depending on the trend.
Your take-profit target can be set at a key market level, such as a previous high or low.
Example:
If you enter a long trade in the bullish FVG at 1.1025, your stop-loss could be placed just below the gap at 1.1010, while your take-profit might be set at a recent swing high around 1.1080.
4. Real-World Example of Fair Value Gaps in Action
1. Example: GBP/USD 1-Hour Chart
Let’s say the GBP/USD pair has been in a strong uptrend, and during a sharp bullish move, a fair value gap forms between 1.3050 and 1.3080.
This gap represents an area where price moved too quickly, leaving unfilled orders from institutions.
- The price continues to rise, reaching 1.3150, but you anticipate a retracement because the FVG has not yet been filled.
- The price eventually retraces to the FVG, dipping into the 1.3050-1.3080 zone.
- You enter a long trade at 1.3060, with a stop-loss below the gap at 1.3030.
- The price bounces from the FVG and resumes its uptrend, reaching your take-profit target of 1.3200.
In this scenario, the fair value gap provided a high-probability entry for a continuation of the uptrend.
5. Why Fair Value Gaps Matter in ICT
In the ICT methodology, Fair Value Gaps matter because they represent the footprints of institutional activity.
When these gaps form, it indicates that large players moved the market rapidly, and the price is likely to return to these levels for rebalancing.
Understanding how to identify and trade FVGs allows retail traders to position themselves alongside institutional order flow, enhancing their chances of success.
By focusing on price rebalancing, traders using FVGs can enter trades at favorable prices, improving their risk-to-reward ratio.
Whether in an uptrend or downtrend, fair value gaps serve as reliable points of interest where the market is likely to react.
6. Conclusion
Fair Value Gaps (FVGs) play a critical role in the ICT approach to trading, offering insights into institutional activity and price imbalances.
These gaps serve as high-probability zones where price is likely to return, providing traders with opportunities to enter trades in line with institutional order flow.
By mastering FVGs, traders can enhance their ability to read the market, capitalize on retracements, and improve their overall trading performance.
Whether you’re a beginner or an advanced trader, incorporating fair value gaps into your strategy can significantly improve your understanding of price action and market dynamics in the context of ICT.
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