Drift is thrilled to introduce you to our new series, "Price Action Concepts 101". This series aims to equip aspiring price action traders with the latest concepts, allowing traders to start implementing these strategies on Drift. To kick off the series, we will delve into the world of Fair Value Gaps (FVGs), a widely-used concept in price action trading.
Lesson 1: Fair Value Gap (FVG)
The Fair Value Gap (FVG) is a widely utilized concept among price action traders today as it aids in the development of trading strategies and decision-making in the markets. Though its origin is uncertain, it is believed to have been popularized by the Inner Circle Trader.
What Is A Fair Value Gap?
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.
How Can I Find FVGs On My Own?
Identifying Fair Value Gaps (FVGs) in the markets can be relatively straightforward due to their large impulse moves. However, if you need extra assistance, there are numerous free indicators available on TradingView that can aid in detecting these imbalances. Simply type in "FVG" or "Imbalance" in the search bar, and any of the top options should be able to assist you in identifying these imbalances in the market.
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Nothing in the text should constitute financial advice, Drift is not responsible for any losses that may occur by following the contents of this article. All content is provided here for educational purposes only.