FVG in the Forex Market: A Trading Guide Beginners Must Know

Basic Understanding of FVG

Traders in the Forex market often face difficulties in finding appropriate entry points. When prices fluctuate violently, identifying Fair Value Gap (FVG) becomes an essential tool to address this issue.

FVG or Fair Value Gap is a price gap that appears on the price chart, caused by rapid and significant price movements. This situation is often observed during periods of low market liquidity, such as market open or close. When the price jumps across a level abruptly, a gap occurs between the bid and ask prices where no trading takes place.

Most traders view FVG as a magnet that attracts price. These gaps are often filled later because the market seeks to bring the price back into alignment with the asset’s true (fair value).

Structure of FVG in Forex Trading

FVG consists of a cluster of three candles moving in the same direction:

First Candle: Creates the starting point of the gap, opening and forming support or resistance.

Second Candle: Known as Imbalance, this is a non-equilibrium candle indicating that a gap is likely to occur. It reflects overwhelming buying or selling pressure in one direction.

Third Candle: Completes the formation of the gap, marking the end of the trading-free zone.

This imbalance occurs when many traders place orders in the same direction within a short period, resulting in a price jump that avoids gradual change. This inefficiency attracts the market to correct itself in the future.

Factors Leading to FVG in the Market

Unexpected News

When important information is announced suddenly, such as changes in interest rates or employment data, and if the data contradicts market expectations, it can trigger frantic buying or selling, causing rapid price movements.

Institutional Investor Actions

Massive trading by hedge funds or financial institutions can create gaps. When such large transactions occur, prices can change swiftly beyond the market’s liquidity capacity.

Low Liquidity Periods

During market open, close, or holidays, when fewer traders are active, even small buy or sell pressures can significantly move prices. Gaps are most frequently observed between Friday market close and Monday market open.

Advantages and Disadvantages of Using FVG

Advantages

Clear Entry and Exit Points: Gaps provide clear signals about critical trading zones.

Flexible Across Timeframes: This technique applies to minute, hourly, daily, and weekly charts, offering high versatility.

Easy to Understand: The concept of FVG is straightforward; beginners can apply it immediately.

Versatile Application: Not only suitable for Forex but also applicable to stocks, commodities, and cryptocurrencies.

Disadvantages and Cautions

Incomplete Signals: Prices do not always create gaps. Relying solely on FVG carries risks.

Requires Confluence with Other Indicators: Combining FVG with other indicators is necessary to confirm signals.

Other Risks: Like any trading technique, risk management and setting stop-loss points are crucial.

Types of FVG and How to Read Them

Bearish Gap (FVG)

Appears as three consecutive red candles, with the second being an Imbalance. Prices tend to rise into the FVG area and then fall further. This indicates a potential downtrend.

Chart Reading: The lowest point of the first candle = upper boundary of the gap → the second candle = no trading zone → the highest point of the third candle = lower boundary of the gap.

Bullish Gap (FVG)

Appears as three green candles in a row. Prices often fall into the FVG area and then rise again. This suggests an ongoing uptrend.

Chart Reading: The highest point of the first candle = lower boundary of the gap → the second candle = no trading zone → the lowest point of the third candle = upper boundary of the gap.

Trading Process Using FVG: 3 Main Steps

Step 1: Trend Analysis

Before following the gap, understand the broader market context by observing the creation of higher highs and higher lows.

In an Uptrend: Prices create higher lows and higher highs. Buying positions are more appropriate.

In a Downtrend: Prices create lower highs and lower lows. Selling opportunities are more favorable.

This context may require switching to higher timeframes, such as 4-hour or daily charts, for a clearer perspective.

Step 2: Identifying Support and Resistance Zones

After understanding the trend, find key decision zones where the price has reacted significantly.

For Buying: Focus on support zones, where buyers tend to appear.

For Selling: Focus on resistance zones, where sellers often enter.

Combine FVG with these zones to increase signal reliability.

Step 3: Risk Management with Stop-Loss and Targets

Stop-Loss: Place above (for selling) or below (for buying) the trading area to protect capital.

Profit Targets: Set at the next support or resistance zone in the trade direction, indicating where the market might change its mind.

Tips for Successful Trading with FVG

Use Multiple Indicators

Combining FVG with other indicators like Moving Averages or RSI helps confirm signals and reduce false positives.

Set Strict Stop-Losses

This risk management tool is essential to limit losses and preserve capital.

Wait for Confirmation from Price Action

Before entering a position, observe whether the market fills the gap with bullish or bearish candles as a clear signal.

Check Entry Timing

Monitoring current market conditions is crucial. Sometimes waiting for the right moment can significantly impact success.

Pay Attention to Liquidity in the FVG Area

If the gap is near the day’s high or low, wait until sufficient liquidity is available before entering to ensure more reliable entries.

Summary

Fair Value Gap is an effective tool for Forex analysis. These gaps provide clear signals about important zones, but should not be used alone. Combining FVG with other analysis methods, setting stop-loss points, and waiting for market confirmation can enhance trading efficiency. With consistent practice and good risk management, traders can leverage these gaps to develop profitable trading strategies.