FVG Forex: What is it? Essential trading strategies for beginners

FVG is an important price analysis technique

Fair Value Gap (FVG) or known as fvg is a price gap that appears on Japanese candlestick charts, caused by rapid and significant price movements in the market. Generally, this gap occurs when the market is closed or has low liquidity, causing prices to jump over certain price ranges without any trading activity.

Many traders view fvg as a magnet for price because the market tends to return to fill the gap. This gap itself signals trading opportunities by reflecting the difference between the current price and the fair value. Using the fvg technique is one way to help predict price movements and set profit targets in the future.

Structure and components of FVG

FVG consists of three candlesticks moving in the same direction. The gap occurs between the wicks of the first and third candlesticks. The second candlestick (called Imbalance) acts as an indicator of the gap formation.

This gap highlights market imbalance caused by large trading volumes in one direction. When traders place many buy or sell orders within a short period, this imbalance creates a difference between the closing prices of the first and third candles, preventing the price from moving gradually.

This imbalance attracts future price changes as the market attempts to correct the gap, turning this area into a magnet for price.

Key points and limitations of using FVG

###Key points

• Clear profit opportunities: FVG often acts as a magnet for prices to return, giving traders chances to profit from these movements.
• Applicable to all timeframes: FVG can be identified on minute, hourly, or daily charts, increasing flexibility in application.
• Easy to learn: The concept of fvg is straightforward enough for beginners to understand and apply immediately.
• Works across various markets: Can be used with stocks, commodities, and cryptocurrencies.
• Provides good returns: Gaps often offer clear entry and exit points, making trade management more efficient.

###Limitations

• Uncertain signals: Prices may not always return to fill the FVG, so caution is necessary, and this technique should not be relied upon solely.
• Requires supplementary analysis: Relying only on FVG is insufficient; it should be combined with other methods to increase accuracy.
• Risks involved: Like all trading techniques, using FVG carries risks. Proper risk management planning is essential.

Situations when FVG occurs

###Unexpected news Sudden news that impacts market sentiment can trigger increased buying or selling, creating gaps as prices move to reflect new information.

###Important economic data Announcements of interest rate changes or unemployment figures that surprise the market can cause rapid price movements, resulting in gaps.

###Institutional trading When funds or banks execute large trades, these massive buy or sell orders can push prices quickly, creating gaps.

###Market open and close times Gaps often occur during low liquidity periods, such as market opening or closing times, when buying or selling pressure is minimal, causing prices to jump without resistance.

###Weekend periods FVG frequently occurs between Friday market close and Monday open, reflecting news or events that happen during the weekend.

Common types of FVG

###Bearish FVG (Downtrend) A common pattern is three consecutive red candles, with the second being an Imbalance. Prices tend to rise into the FVG zone, indicating a potential downtrend. Opening sell orders may be beneficial since prices are likely to decline after the correction.

Chart reading:

• The lowest point of the first candle is the top of the FVG.
• The second candle indicates a price change.
• The highest point of the third candle is the bottom of the FVG.

###Bullish FVG (Uptrend) A pattern of three green candles, with the second being an Imbalance. Prices tend to fall into the FVG zone, indicating the uptrend continues. Opening buy orders may be advantageous as prices tend to bounce back quickly after the correction.

Chart reading:

• The highest point of the first candle is the bottom of the FVG.
• The second candle indicates a price change.
• The lowest point of the third candle is the top of the FVG.

Basic steps to trade with FVG

###Step 1: Determine the trend direction Understanding market sentiment is crucial. If prices are making higher lows continuously, you are in an uptrend and should buy. Conversely, if prices are making lower highs and lower lows, indicating a downtrend, you should sell.

Set the timeframe for decision-making, sometimes switching to higher timeframes like 4 hours, daily, or weekly for better clarity.

###Step 2: Identify support and resistance zones After determining the trend, identify resistance and support zones aligned with that trend. In an uptrend, focus on support zones as they are areas of high buying interest. In a downtrend, focus on resistance zones where selling pressure may be high.

###Step 3: Set stop-loss and profit targets When entering a trade, place stop-loss above the entry zone to protect capital if the market moves against you. Profit targets should be set above the next support zone, indicating where the market might reverse.

Key tips when trading with FVG

###Use multiple indicators FVG is just one part of a strategy. Combine it with other indicators to gain deeper insights. This combination can help identify more accurate entry and exit points.

###Strictly manage stop-losses Risk management is vital. Stop-losses protect profits and reduce potential losses.

###Wait for market confirmation Before entering a trade, wait for confirmation that the market will move in the direction of the gap. Confirmation can be observed from bullish or bearish candlesticks.

###Consider timing Timing is critical in trading. Ensure you enter the market at appropriate times. Patience and precise timing can significantly improve trading results.

###Choose high-liquidity zones Pay attention to areas with high liquidity, especially near previous day’s highs or lows. Wait for liquidity to build in these zones before trading. This approach provides more reliable entry points.

Summary

Fair Value Gap or fvg is a highly useful chart analysis tool in Forex, which can increase the chances of profitable trades. However, traders should use FVG alongside other analysis methods to reduce risks.

Understanding what fvg is and practicing trading with insights from various indicators will help you gain a deeper understanding of the constantly changing Forex trading world.