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Before diving into the practical use of the Fair Value Gap in trading, it's crucial to have a clear understanding of what it is and how to identify it on your charts. The Fair Value Gap, or FVG, is a widely utilized tool among price action traders to detect market inefficiencies or imbalances. Sometimes you will even see them labeled as inefficiencies by other traders. These imbalances arise when buying or selling pressure is significant, resulting in a large upward or downward move, leaving behind an imbalance in the market.

The idea behind FVGs is that the market will eventually come back to these inefficiencies in the market before continuing in the same direction as the initial impulsive move. FVGs are important since traders can achieve an edge in the market. Price action traders can also use these imbalances as entry or exit points in the market.

For a FVG to develop, there must be a set of three candles characterized by heavy buying or selling in the same direction. When there is a large move in either direction, a gap will be formed between the first candle's wick and the wick of the last candle, as illustrated in the figures below.

The illustration below does not depict a Fair Value Gap, as the previous candle's high level has counterbalanced the low level of the third candle. This price action is considered to be balanced.

How To Use FVGs To Trade Price Action?

Fair Value Gaps (FVGs) can be found on all timeframes and there are numerous trading strategies that can be implemented using them. In this example, we will focus on utilizing FVGs for trend continuation after a significant impulsive move. As previously mentioned, we can anticipate the price to return to these FVGs before continuing in the same direction as the impulse move. Traders can take advantage of this by waiting for the price to reach the FVG area of interest and then entering a trade, targeting trend continuation.

For example, let's take a look at the Solana chart during its large run in January 2023. As seen on the left side of the chart, a FVG was formed and price consolidated over several days before it returned to test the FVG. Traders might have used this FVG as a key level of interest for entry into a long trade on SOL and rode it for further trend continuation. #dyor #Bitcoin #Btc