Fair Value Gap Strategy
Last updated
Last updated
A FVG is just when price spikes up or down so fast, that buyers/sellers do not have enough time to counteract the movement. Which creates an imbalance in the market.
When the market has these imbalances, it will often want to return to this untested price and try to test it again. Most of the time, rejecting back to where it was previously.
You would measure this area by taking the candle's wick before the big spike & taking the candle's wick after the spike. This zone is the untested area (Fair Value Gap).
Luckily for you, our indicator does all this for you automatically. Just go to the settings of the indicator and enable "Fair Value Gaps".
Our indicator will automatically place FVG's on your chart in real-time. It will also label them as bullish (green) or bearish (red).
First things First, you want to find a key support or resistance. For this example we are going to be shorting, so we need to look for a major resistance. If you wanted to do a long trade, you would look for a support.
You can find a key resistance by just finding a recent swing high or by going on a higher timeframe (like the 1 hour) and looking for major levels of resistance. The stronger the resistance, the better.
So we went on the 1 hour time frame and found a major resistance, where price rejected multiple times previously.
The next step is we want to find a false breakout. A false breakout is just when price breaks a key support or resistance and starts acting like it's going to keep going, then ends up failing, and heads the opposite direction.
False breakouts are crucial because traders that would be going long on a potential breakout trade would be setting their stop losses right below their entry. If it ends up being a false breakout, price will then end up hitting all their stop losses adding fuel to the fire of the downwards momentum.
So, you want a false breakout to be made on your strong resistance/support that you plotted earlier. Here, the resistance barely got broken, but as long as it's a false breakout, it will work.
We want to find two lowers after the false breakout. This will confirm that prices wants to start heading downwards. The clearer the two lows are, the better.
Price ends up making two lower lows on our chart. Even though the two lower lows arent' "perfect" with a confusing candle wick in between, it will still work.
This next step is crucial. After price has made two lower lows, we will look for our short trade entry. We do this by finding a bearish fair value gap on the chart where price will likely return.
Make sure to enable your fair value gap tool on the indicator so you can easily spot them.
On the last low, we had two bearish Fair Value Gaps. Our entry point will be in the middle of the highest Fair Value Gap.
If there are multiple FVG's on the 2nd low, just plot your entry point on the highest FVG. Sometimes price will not reach it, and you'll miss out on the trade. It's alright, there will always be more trades. Aiming for the high FVG will give you the best risk/reward ratio.
So Price hit the middle of our fair value gap, so we entered a short trade. You can set your stop loss at the recent swing high or right above the original strong resistance. I prefer using the swing high, as it has a better risk/reward ratio. You will get stopped out more, but I find it to perform better. Do your own testing and see what works best for you.
You will be setting your take profit where the original move started. Most of the time this area is pretty obvious.
You should also be taking partial profits (25%-50%) at key hesitation points in the chart for guaranteed profits. Price will not always make it to the original start of the low. Sometimes it will only go down to the last hesitation area and will proceed to go back up. It's good to take profits at these areas just in case price decides to do so.
As you can see price hit all three of our take profit areas and we made an absolute killing off this trade.
P.S I'm sorry if this article wasn't clearly written. I'm currently writing this at 4am. It's a pretty confusing trading topic, but hopefully, I described it pretty well. You can get way more advanced with this strategy by using FVGs as take profits, using divergences with the fakeouts, and so many other trading techniques.
Thought I would just cover the basics for now and give you a basic understanding of how this strategy works.
If you are more of a visual learner, I made a full YouTube video describing how to use this strategy.
