ICT Fair Value Gap(FVG): Definition,How it works,trading Strategty and example
ICT Fair Value Gap (FVG) is a three-candlestick pattern formed when the price in the market is delivered inefficiently. When the price is delivered in an inefficient manner by the Inter-Bank Price Delivery Algorithm (IPDA), it creates a gap. This gap acts as a magnet for the price. The price will come back to fill this gap and provide traders with an opportunity to execute their positions.
What is ICT Fair Value Gap (FVG)?
An ICT FVG is a three candlestick pattern in which the body of 2nd candle is not filled by the wick of first and 3rd candle.This gap is created when price is delivered only in one direction. ICT explain this gap is the sign that smart money enter into the market and inject a lot of volatility.Due to this volatility price is deliver only in one direction.
What is Bullish Fair Value Gap?
A Bullish ICT Fair Value Gap (FVG) is formed when there is buy-side inefficiency and sell-side imbalance, as shown in the image below. This occurs when the price is delivered primarily on the buy side, with minimal activity on the sell side. The resulting gap acts as a potential area where the price may retrace, giving traders an opportunity to enter long positions.
What is ICT Bearish Fair Value Gap?
A Bearish Fair Value Gap (FVG) is formed when there is sell-side inefficiency and buy-side imbalance in the price. This happens when the price is delivered predominantly on the sell side, with less activity on the buy side. The gap created may attract the price back to fill it, providing traders an opportunity to execute short positions.
Psychology Behind These Gaps
When there is a sudden surge in buying or selling pressure—often triggered by factors such as market sentiment shifts, breaking news, or substantial institutional orders—the market may not have sufficient time to execute all buy or sell orders at intermediate price levels. As a result, certain price levels are bypassed during the rapid price movement, creating a gap in the market. This phenomenon highlights the inefficiencies in order execution and can lead to significant trading opportunities.
What is the best strategy for FVG?
Trading using Fair Value Gaps (FVGs) requires a complete and structured trading framework. It’s not simply about marking the FVGs on the chart and executing long or short positions when the price reaches these gaps. A well-rounded approach involves understanding the market context, confirming price action, and applying risk management strategies before entering trades based on FVGs.
- Trade in Kill Zones: Focus on the London Open or New York Open, which are times of high liquidity and institutional activity.
- Wait for Liquidity Sweep: Mark the high and low on the 15-minute chart during the Kill Zone and wait for a price sweep, breaking either the high or low.
- ICT Market Structure ExplainedConfirm Market Structure Shift: On the 5-minute or 3-minute chart, look for a break in market structure that aligns with your daily bias (bullish or bearish).
- Find FVG on 1-Minute Chart: Once the market structure shift is confirmed, look for a Fair Value Gap to mark a high-probability entry point.
- Execute Trades:
- For long trades, enter when price fills the FVG and place the SL below the wick of the first candle.
- For short trades, enter when price fills the FVG and place the SL above the wick of the first candle.
- Set Take Profit (TP): Target the next liquidity level or the ICT Optimal Trade Entry as your TP.
Can Fair Value Gaps be used in all financial markets or just forex?
Fair Value Gaps (FVGs) can be used in different markets, not just forex. They help traders spot price imbalances and opportunities in:
- Forex: Identifying price changes.
- Stocks: Finding potential trading chances.
- Commodities: Showing price inefficiencies during market swings.
- Cryptocurrencies: Spotting potential reversals and entry points.
In simple terms, FVGs are a useful tool for traders to take advantage of price gaps in various markets.
What are the risks associated with trading Fair Value Gaps?
The fundamental assumption in FVG trading is that prices will revert to fill the gap. However, this is not guaranteed, and prices may continue to move away from the gap, leading to potential losses for traders if their expectations are incorrect.
What is the success rate of fvg strategy?
The success rate of the Fair Value Gap (FVG) trading strategy can vary widely depending on several factors such as market conditions, the trader’s experience, and how well the strategy is implemented.I take 10 trades on EURUSD pair and win rate is more then 78%.
