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Fair Value Gap
The Fair Value Gap (FVG) strategy is based on imbalances created through quick, single-candle price moves that leave areas of price with very little price action.
These large moves lead to imbalances in the market that often drive price action back to that area for a retest. The market (market algos) needs to confirm those prices were fairly skipped over by returning to them and, ultimately, rejecting them to continue the initial trend.
A Fair Value Gap zone is drawn using three consecutive candles. The inside candle is the large "imbalance" candle and the lows and highs of the candles directly adjacent to that imbalance candle are what you'll use to draw your zone.
If the large imbalance candle you have identified is a bearish candle, you’ll start drawing your zone at the previous candle’s low (that includes the candle wick when applicable) and the following candle's high. The previous candle's low will be the high point of your fair value gap and the following candle's high will be the low point of your fair value gap.
The prices between that first candle low and the third candle high are the areas of imbalance in the market that will act as a magnet for price to return.
If the large imbalance candle you have identified is a bullish candle, you’ll start drawing your zone at the previous candle’s high and the following candle's low. The previous candle's high will be the low point of your fair value gap and the following candle's low will be the high point of your fair value gap.
The prices between that first candle high and the third candle low are the areas of imbalance in the market that will act as a magnet for price to return.
Though fair value gaps can lead to good trading opportunities, always look for additional confluences when attempting to trade off them as they are very common and aren't valid in all instances.
Fair value gaps around key levels such as range highs/lows and HODs/LODs are generally good targets, but are best used with additional technical or fundamental indicators supporting your trading ideas.