What is Fair Value Gap (FVG)?

Why Do Fair Value Gaps Form?

FVG in trading usually forms when strong market activity creates a sudden price movement. Common reasons include:

1. Large institutional orders: Big trades from institutions can create strong movements where some price levels receive limited trading activity.

2. High volatility: Rapid buying or selling pressure can move prices quickly and create imbalance zones on charts.

3. Strong market momentum: When buyers or sellers dominate the market, prices may move faster than normal and leave gaps behind.

4. Major news events: Economic updates, company announcements, or market events can cause sudden price changes.

How to Identify a Fair Value Gap?

After understanding FVG full form and meaning let’s understand how to identify the same:

A FVG can usually be identified through a three-candle pattern on a price chart. Traders look for the following points:

1. The first candle shows a strong price movement in a particular direction.
2. The second candle continues the momentum with a larger price to move.
3. The third candle does not fully overlap with the first candle range, creating an imbalance zone.
4. The area between the first and third candles represents the possible fair value gap.

Example: Suppose a stock is trading at ₹500 and suddenly moves to ₹530 due to strong buying. If very few trades happen between ₹500 and ₹530 during this movement, that range may become a fair value gap. Traders may watch this zone if the price returns to that level later.

How Do Traders Use Fair Value Gaps?

Traders use FVG to study possible price reactions and market imbalance areas.

1. Identifying Possible Support and Resistance Zones

• A bullish fair value gap may act as a support area when price returns from higher levels.
• A bearish fair value gap may act as resistance when price moves back from lower levels.
• Traders observe these zones to understand possible market reactions.

2. Finding Entry and Exit Areas

• Traders may wait for the price to return to the FVG zone before considering an entry.
• Some traders use these areas to plan possible exit levels during market movements.
• FVGs can help identify areas where prices may react.

3. Combining FVG With Other Indicators

• Traders often combine fair value gaps with support, resistance, volume, and trend indicators.
• Tools like moving averages and RSI can provide additional market context.
• Using multiple factors can help traders understand price behaviour better.

Types of Fair Value Gap

FVG can appear in different market conditions. The main types include:

1. Bullish Fair Value Gap:

A bullish FVG forms during an upward price movement. It occurs when buying pressure pushes prices higher quickly, leaving an imbalance area. Traders may view this zone as a possible buying area if prices return.

2. Bearish Fair Value Gap:

A bearish FVG develops during a downward price movement. It appears when selling pressure causes a sharp decline, creating an imbalance zone. Traders may consider this area as a possible resistance zone.

Pros and Cons of Fair Value Gaps

The following table covers the pros and cons of fair value gaps:

Conclusion

FVG helps traders understand areas where strong price movements create imbalance between buyers and sellers. These zones can provide useful information about possible price reactions and market behaviour. However, FVGs should be studied with other technical indicators and proper risk management methods. Understanding different types of Fair Value Gaps and their uses can help traders analyse charts more effectively.