In Inner Circle Trader (ICT) methodology, Fair Value Gaps (FVGs) are important tools for understanding imbalances in price action.
They help traders spot opportunities where the market may retrace to “fill” these gaps, offering potential trade setups.
This guide explains how to identify and trade FVGs, providing detailed steps and examples to help you incorporate this concept into your trading strategy.
What is a Fair Value Gap (FVG) in ICT?
A Fair Value Gap refers to a price imbalance that occurs when the market moves too quickly in one direction, leaving gaps between the closing price of one candle and the opening price of another.
In a balanced market, every buy order has a matching sell order, but during periods of volatility or aggressive moves, price may move too fast, creating an imbalance or “gap” between buyers and sellers.
ICT traders believe that the market tends to fill these gaps, as institutions often seek fair value to enter or exit large positions.
FVGs serve as a magnet for price, providing opportunities to enter trades when the market retraces to fill these gaps.
1. How to Identify Fair Value Gaps in ICT Trading
To identify an FVG, follow these simple steps:
1. Look for Imbalances in Price Action:
The first step is to find a price movement where there is a gap between two or more candles.
FVGs occur when there is no overlap between the wicks (or tails) of consecutive candles.
2. Focus on Strong Impulsive Moves:
FVGs usually form during strong bullish or bearish moves. Look for periods where price moves aggressively in one direction, leaving little room for price to “balance” in the opposite direction.
3. Mark the FVG:
Once identified, mark the area between the closing price of the first candle and the opening price of the next candle that creates the gap.
This area represents the FVG, and the market is likely to retrace to it at some point.
4. Example of Identifying an FVG:
Imagine you’re observing the EUR/USD pair, and you notice a strong bullish move.
Let’s say the market creates a bullish candle that closes at 1.1800, followed by another bullish candle that opens at 1.1810.
There is no overlap between the wicks of these candles, and this creates an FVG between 1.1800 and 1.1810.
2. Why Fair Value Gaps Matter in ICT Trading
In ICT, the idea is that price is drawn to areas of imbalance to ensure that the market is operating efficiently.
Fair Value Gaps are important because they represent price levels where institutions may need to revisit, providing retail traders with an opportunity to enter trades.
1. FVGs as Targets:
In a bullish trend, FVGs can act as potential retracement levels for price before continuing upward.
Similarly, in a bearish trend, FVGs can act as potential targets for price to retrace before continuing downward.
2. FVGs as Entry Zones:
ICT traders use FVGs as entry zones for trades.
When price retraces to an FVG, this can be a potential area to enter long or short positions, depending on the overall market direction.
3. How to Trade Fair Value Gaps in ICT
Trading FVGs can be a powerful tool in the ICT framework. Here’s how to incorporate FVGs into your trading strategy:
1. Identify the Overall Market Bias
Before trading FVGs, you need to establish whether the market is in a bullish or bearish trend.
Use market structure, order blocks, or other ICT concepts to determine the overall direction.
- Bullish Market: In a bullish market, look for FVGs as potential retracement points to enter long positions.
- Bearish Market: In a bearish market, look for FVGs as potential retracement points to enter short positions.
2. Mark the Fair Value Gap
Once you’ve identified the market bias, look for areas where price has created a fair value gap during impulsive moves.
Mark the gap, and keep an eye on it for potential trade setups.
3. Wait for Price to Retrace
Patience is key when trading FVGs. Wait for the market to retrace to the FVG zone.
The retracement to this level is often a signal that institutions are filling the imbalance before the price continues in the original direction.
4. Enter the Trade
When price retraces to the FVG, enter a trade in line with the overall market direction:
1. Bullish FVG:
If the market is in a bullish trend and price retraces to a fair value gap below the current price, consider entering a long position at or near the FVG.
2. Bearish FVG:
In a bearish trend, if price retraces to a fair value gap above the current price, consider entering a short position.
5. Use Confirmation for Entry
Look for confirmation signals like candlestick patterns (e.g., bullish/bearish engulfing, pin bars) or a change of character (CHOCH) to validate the trade.
This increases the probability of the trade working in your favor.
6. Set Stop-Loss and Target
Place your stop-loss below the FVG (for a long trade) or above the FVG (for a short trade) to manage risk.
As for your target, aim for previous highs or lows, or another key level identified in the ICT strategy, such as an order block or liquidity pool.
4. Example of Trading a Fair Value Gap
Let’s say the GBP/USD pair is in a clear uptrend. During a strong bullish move, price creates an FVG between 1.3000 and 1.3020.
After a few candles, the market retraces to this FVG, offering a potential long entry.
- Market Bias: Bullish trend.
- FVG Identified: A gap between 1.3000 and 1.3020 during an impulsive move.
- Retracement: Price retraces to the FVG zone, filling the gap.
- Entry: Once the price touches 1.3010 (inside the FVG), enter a long position.
- Stop-Loss: Place a stop-loss just below the FVG at 1.2995.
- Target: Set your target at 1.3050, aiming for a recent swing high.
In this scenario, the market fills the FVG before continuing its bullish trend, offering a low-risk, high-reward trade setup.
5. Tips for Trading FVGs Effectively in ICT
1. Combine with Other ICT Tools:
Use FVGs in combination with other ICT concepts, such as market structure, liquidity pools, and order blocks, for higher probability trades.
2. Time Your Entry:
Be patient and wait for confirmation before entering a trade when price fills the FVG.
3. Risk Management:
Always use proper risk management techniques, including stop-loss orders, to protect your capital.
6. Conclusion
Fair Value Gaps (FVGs) are a crucial concept in the ICT framework, representing price imbalances that are often revisited by the market.
By identifying and trading these gaps, traders can align themselves with institutional moves, capturing high-probability trade setups.
The key is to identify the FVG, wait for a retracement, and enter trades in the direction of the market bias, using proper risk management techniques.
Understanding how to leverage FVGs, in combination with other ICT concepts, can significantly improve your ability to spot profitable trades and stay ahead of retail traders.
By mastering FVGs, you’re well on your way to enhancing your trading skills with ICT strategies.
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