How to Use the Fair Value Gap in Forex Trading

What is the Fair Value Gap Forex?

The Fair Value Gap is a strategy traders use in Forex as well. It shows an imbalance in price action, where the market moves too fast to fill all orders, leaving gaps that buyers and sellers miss out on.

The Fair Value Gap Forex is a magnet for price action, creating opportunities for traders to enter and exit. This gap also shows where large orders are typically traded and the level of market liquidity.

Bullish Fair Value Gap vs Bearish Fair Value Gap

Let’s see the differences between the bullish FVG and bearish FVG in the forex market.

Bullish Fair Value Gap

• Bullish FVG is a gap that you will find during an uptrend.

• The highest wick from the 1st candlestick should not overlap with the 3rd candlestick.

• When the price comes back to the FVG gap zone, it’s more likely to rise back up again. But if the price comes back and goes through the bottom of the zone, then we won’t count it as this FVG is valid.

Bearish Fair Value Gap

• A bearish FVG is a gap you will find during a downtrend.

• The lowest wick from the 1st candlestick should not overlap with the 3rd candlestick.

• When the price comes back to the FVG gap zone, it’s more likely to go down again. But if the price reverses and goes up, then we won’t count it as this FVG is valid.

How to Identify Fair Value Gap in Forex?

Spotting the Fair Value Gap in the Forex market will help you find better trading setups, entry, and exit points. Let’s see how to identify them.

1. The Fair Value Gap appears with 3 candlesticks as always.

2. Check if they have gaps from the 1st and the 3rd candlesticks 

3. And make sure the wicks do not overlap between the 1st and the 3rd candlesticks

That’s it, if the checkups pass through, then we will apply this to our strategy below.

Things You Need to Know Before Using Fair Value Gap

Before using Fair Value Gaps in the Forex market, there are a few things you need to understand to make sure that you can use this fvg trading strategy effectively.

Understand Market Structure to identify trends.

Sometimes, the candlesticks alone can tell a lot about how the price moves. If the candlesticks go HH and HL, it means the market is going up; if they go LH and LL, it means the market is in a downtrend.

Understand the Timeframes

Fair Value Gap in trading also matters. FVGS are clearer on lower timeframes, while in the bigger timeframes, you will see only one large zone.

Also, it depends on your trading strategy and style.

If you are a day trader then you might prefer smaller timeframes, while the swing traders and investors might prefer larger ones.

Learn about the Liquidity in the Forex Market

Liquidity refers to the availability of buy and sell orders in the market. Sometimes the price comes back to the FVG zone just to trick some traders, and this happens when the smart money is collecting liquidity.

We can use liquidity as our confirmation before entering by searching for a liquidity sweep in the FVG gap zone.

Understand the Price Action

The simple price action you need to understand is to read candlestick patterns to avoid false signals and to understand candlestick behavior.

Price action is more than just reading candlesticks; understanding supply and demand zones will help you identify your support and resistance levels.

Fair Value Gap Strategy: Step by Step

Here’s the Fair Value Gap strategy guideline to help you use FVG more effectively.

Step 1: Identify the trend direction

Before finding the Fair Value Gap, let’s see what direction the price is going: up, down, or sideways.

If the price is currently going sideways, then you shouldn’t now trade using the Fair Value Gap strategy. But if the price is going either up or down, we can see the rules here:

• Bullish FVG when the middle candle goes up, we should consider buying.

• Bearish FVG when the middle candle goes down, we should consider selling.

Step 2: Identify the Fair Value Gap in the Forex market

Let’s first identify the 3 candlesticks as we have mentioned earlier.

• If the market is currently in an uptrend, then we need to check the highest candlestick to the lowest candlestick.

• If the market is currently in a downtrend, then we need to check the lowest candlestick to the highest candlestick.

Make sure that they’re valid FVGs and that you can count on this zone.

Step 3: Place Entry

When the price reaches the Fair Value Gap zone and shows a candlestick confirmation, such as a Hammer, a Shooting Star, or a strong rejection wick.

Always have to wait to see if the candlestick fills the gap before you can consider entering a Buy or Sell.

Step 4: Place Stop-Loss

You should place your shop loss above the Fair Value Gap or a bit inside the Fair Value Gap zone. This also depends on your strategy and the Forex volatility.

Step 5: Place Take-Profit

You can use risk-to-reward at 1:3 to 1:4 to take profit, or place your target at the support or resistance level at the previous highs or lows. If you are familiar with indicators, using Fibonacci to set up a profit level is also effective.

Pros and Cons of Trading Fair Value Gap in Forex market

Using the Fair Value Gap has pros and cons, as do the other strategies. To make it more effective, you should always combine it with other strategies. But now, let’s have a look at the Pros and Cons, you should know.

Pros of trading Fair Value Gap

• It helps you see price reversals for entry and exit points in your bets.

• It helps traders make better, more logical decisions based on price action and reduce emotional trading.

• FVG always works best with trend trading and SMC tools.

Cons of trading Fair Value Gap

• There are so many FVGs that appear in the Forex market.

• Not all Fair Value Gaps are valid, and it might confuse beginners.

• Sometimes, you need a strong break of structure or liquidity to trade with FVGs.

Conclusion

Fair Value Gaps in the Forex market can be really useful, especially if you use the ICT or SMC strategy in trading.

Also, understanding Fair Value Gaps Forex will help you interpret market price movements, enabling you to find better entry and exit points.

Trading in the Forex market, you have to be really patient and control your emotions in this highly volatile market, so knowing these FVGs will help you see more logical opportunities based on the price action to enter the trade.

Using this strategy with risk management will help you manage your balance and increase your winning rate.