Fair Value Gaps (FVGs) represent significant price movements in a financial instrument where the price action skips certain levels, leaving a void or gap on the chart. These FVGs can provide critical insights into market sentiment and potential future price movements. Letâs explore the different types of FVGs, their characteristics, and how to identify and trade them effectively.
1. Bullish and Bearish Fair Value Gaps (FVGs)
Bullish FVGs:
Characteristics:
Occurs when the opening price is significantly higher than the previous close, creating an upward FVG.
Indicates strong buying interest and can signal the start of a bullish trend or continuation of an existing one.
How to Identify:
Upward FVG: Look for a noticeable FVG where the current dayâs opening price is above the previous dayâs high.
Volume: Higher volume during the formation of the FVG strengthens the bullish signal.
Trend Context: In an uptrend, a bullish FVG can indicate the continuation of the trend. In a downtrend, it may suggest a potential reversal if accompanied by strong volume and price action.
Trading Implications:
Confirmation: Traders often seek confirmation of the bullish FVG by observing if the price continues to rise after the FVG. Entering long positions on confirmed bullish FVGs can be a profitable strategy.
Support Level: The FVG area often acts as a new support level, where the price might find a floor in case of a pullback.
Bearish FVGs:
Characteristics:
Occurs when the opening price is significantly lower than the previous close, creating a downward FVG.
Reflects strong selling pressure and can indicate the start of a bearish trend or continuation of an existing downtrend.
How to Identify:
Downward FVG: Identify a clear FVG where the current dayâs opening price is below the previous dayâs low.
Volume: Higher volume during the formation of the FVG strengthens the bearish signal.
Trend Context: In a downtrend, a bearish FVG typically signals the continuation of the trend. In an uptrend, it may indicate a potential reversal, especially if followed by strong bearish price action.
Trading Implications:
Confirmation: Confirmation of the bearish FVG comes when the price continues to fall after the FVG. Short positions can be initiated based on this confirmation.
Resistance Level: The FVG area may act as a new resistance level, where the price might struggle to rise in case of a recovery attempt.
2. Runaway (or Measuring) Fair Value Gaps (FVGs)
Characteristics:
Trend Location: Occurs in the middle of a strong, established trend (bullish or bearish).
Market Momentum: Indicates strong market momentum with little to no significant resistance or support nearby.
Continuation: Typically followed by continued movement in the direction of the prevailing trend.
How to Identify:
Trend Confirmation: Ensure that the FVG occurs within a well-established trend.
FVG Placement: The FVG should appear midway through the trend, often signaling that the trend has more room to run.
Volume: There may be an increase in volume, but this is less crucial compared to other FVGs.
No Immediate Filling: The FVG usually does not get filled quickly, as the trend continues strongly.
Trading Implications:
Confirmation: This FVG acts as a continuation signal, confirming that the trend is likely to persist. Traders often use this FVG to gauge the strength of the trend and set targets based on the FVG size.
3. Exhaustion Fair Value Gaps (FVGs)
Characteristics:
End of Trend: Appears near the end of a long or steep trend, signaling a potential reversal.
Volume: Accompanied by decreasing volume, suggesting waning interest in the trend.
Final FVG: Often the last FVG in a series, marking the exhaustion of the trend.
How to Identify:
Trend Length: The FVG typically occurs after a prolonged trend, indicating that the trend may be losing steam.
Volume Decrease: Look for a reduction in trading volume compared to earlier in the trend.
Reversal Indicators: After the FVG, watch for reversal signs such as price moving against the prior trend or stalling.
Support/Resistance: Often occurs near key support or resistance levels, increasing the likelihood of a reversal.
Trading Implications:
Reversal Signal: The exhaustion FVG is a strong reversal signal. Traders may look to exit their positions or even take positions in the opposite direction once confirmation of the reversal is observed.
4. Common (or Area) Fair Value Gaps (FVGs)
Characteristics:
Consolidation Phase: Typically occurs during a trading range or period of consolidation.
Minimal Impact: Not associated with significant price movements and usually gets filled quickly.
Low Volume: Often occurs on low volume, indicating a lack of strong market interest.
How to Identify:
Range Bound: Look for FVGs within a horizontal price range or during a consolidation phase.
Small Size: The FVG is usually small, with a minimal price difference between the close of one bar and the open of the next.
Quick Filling: The FVG is likely to be filled within a few trading sessions.
Trading Implications:
Low Significance: Common FVGs do not typically indicate a new trend or major price movement. They are often disregarded by traders or used for short-term trades when expecting the FVG to be filled quickly.
5. Midpoint Fair Value Gaps (FVGs)
Characteristics:
Mid-Trend Location: Occurs around the midpoint of a trend, similar to runaway FVGs.
Continuation Signal: Suggests that the trend is likely to continue.
How to Identify:
Trend Identification: The FVG should occur in the middle of an established trend.
50% Location: Check if the FVG appears around the 50% point of the trend's movement from its start to its current position.
Moderate Volume: There might be a moderate increase in volume, indicating continued interest in the trend.
Trading Implications:
Trend Projection: Traders often use the size of the midpoint FVG to project the continuation distance of the trend. The FVG may also serve as a new support or resistance level.
6. Island Reversal Fair Value Gaps (FVGs)
Characteristics:
Double FVG Formation: Consists of two FVGsâone in the direction of the current trend and another in the opposite direction after a short consolidation, forming an "island."
Strong Reversal Signal: Marks the end of a trend and the beginning of a new one.
How to Identify:
Initial FVG: Identify the first FVG that aligns with the existing trend.
Consolidation Phase: A brief period of sideways movement or consolidation typically follows.
Second FVG: Look for an FVG in the opposite direction, creating an isolated price "island."
Volume Spike: The reversal FVG may come with increased volume, signaling a shift in market sentiment.
Trading Implications:
Reversal Confirmation: The island reversal FVG is a strong indicator of a trend reversal. Traders often use it to enter positions in the new trend direction once the reversal is confirmed.
7. Professional Fair Value Gaps (FVGs)
Characteristics:
Trend Confirmation: Occurs in the direction of the prevailing trend, typically on high volume.
Institutional Involvement: Suggests the participation of institutional traders or "smart money."
Sustained Movement: Price generally continues in the direction of the FVG without immediate filling.
How to Identify:
Trend Alignment: The FVG should align with the current trend, strengthening its direction.
High Volume: A significant increase in trading volume is a key indicator of professional FVGs.
FVG Persistence: The FVG is not filled quickly and often serves as a new support or resistance level.
Trading Implications:
Trend Reinforcement: Professional FVGs reinforce the trend, signaling strong market participation. Traders can use these FVGs to confirm the strength of a trend and set targets accordingly.
8. Novice Fair Value Gaps (FVGs)
Characteristics:
Early Trend: Occurs at the beginning of a new trend or after a quiet period.
Low Volume: Typically on lower volume, indicating a lack of strong market conviction.
Potential Reversal: These FVGs can be misleading, as they may not lead to a sustained trend and could reverse quickly.
How to Identify:
Early Appearance: The FVG often appears at the start of what seems to be a new trend.
Low Volume: The volume is usually not significant, suggesting the move might lack strength.
False Signal: The FVG may be a false signal if it is filled quickly or if the price stalls shortly afterward.
Trading Implications:
Caution Advised: Novice FVGs should be treated with caution, as they may not indicate a strong trend. Traders often wait for additional confirmation before acting on these FVGs, as they can quickly reverse.
Summary
Understanding the different types of Fair Value Gaps (FVGs) and their implications is essential for making informed trading decisions. Each type of FVG has unique characteristics that signal different market behaviors and potential future movements. By recognizing these FVGs and incorporating them into your analysis, you can better predict market trends and enhance your trading strategy.