Fair Value Gaps Explained : A Comprehensive Guide

Fair Value Gaps (FVG) are a concept commonly used in technical analysis, particularly in smart money trading strategies. They occur when there is an imbalance in the market due to rapid price movements, leaving behind inefficiencies that price may later revisit. Understanding FVGs can help traders identify potential entry points, stop-loss placements, and areas of support and resistance.

What is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) occurs when there is an imbalance in price action, typically forming after a strong impulsive move. This gap is seen as an inefficiency in the market, often created by institutional orders that leave behind an area where price did not trade efficiently.

FVGs are generally characterized by a three-candle pattern:

The first candle moves aggressively in one direction (either bullish or bearish).
The second candle continues in the same direction, creating a gap between the first and third candles.
The third candle does not fully overlap with the first candle, leaving a visible gap.

These gaps are often revisited as the market seeks equilibrium, making them crucial zones for traders to watch.

How to Identify Fair Value Gaps

Identifying a Fair Value Gap requires careful observation of price action on a candlestick chart. Follow these steps to spot them:

Look for Strong Impulsive Moves
- Identify large, fast-moving candles with minimal retracement.
- This could be a breakout, a significant price rally, or a sharp drop.
Spot the Gap
- Observe the three-candle structure.
- The middle candle should have a large body and minimal wick overlap with the first and third candles.
- The space between the wicks of the first and third candles forms the Fair Value Gap.
Mark the Zone
- Draw a box or zone from the high of the first candle’s wick to the low of the third candle’s wick (or vice versa for bearish gaps).
- Price may later retrace into this area before continuing its trend.

Using Fair Value Gaps for Entry

FVGs can serve as powerful entry points when combined with other confluences like market structure, order blocks, and liquidity levels.

Entry Strategies

Reversal Entry from FVG
- When price retraces into the Fair Value Gap, traders can look for rejection signals (such as pin bars or engulfing candles) to enter in the direction of the previous move.
- Confirmation can come from indicators like RSI divergence or volume analysis.
Continuation Entry from FVG
- In strong trends, price often pulls back into FVGs before continuing in the trend direction.
- A trader can enter on a retracement to the FVG, placing a stop-loss just beyond the gap.
Breakout Retest of FVG
- If price breaks through a resistance or support level and creates an FVG, a retest of this gap can provide an entry opportunity for a breakout trade.

Best Timeframes for Trading FVGs

Fair Value Gaps can be used across multiple timeframes, depending on the trader’s style and strategy:

Higher Timeframes (Daily, 4H, 1H)
- Ideal for swing traders looking for strong institutional moves.
- Higher probability of price revisiting and respecting the FVG.
Medium Timeframes (15M, 30M, 1H)
- Suitable for intraday traders looking for quick moves based on FVGs.
Lower Timeframes (1M, 5M)
- Used by scalpers to find rapid inefficiencies and quick reversals.
- More noise and false signals, so additional confirmations are needed.

Traders should align their FVG analysis with the overall market structure on higher timeframes for better accuracy.

Fair Value Gaps as Support and Resistance

FVGs can act as dynamic support and resistance zones.

Bullish FVG (Support)
- If price is in an uptrend and an FVG forms, the gap often serves as a future support level.
- When price retraces into the FVG, buyers may step in, pushing the price higher.
Bearish FVG (Resistance)
- In a downtrend, an FVG may act as resistance.
- When price retraces into the FVG, sellers may step in, leading to a continuation of the downtrend.

FVGs that align with traditional support/resistance zones, Fibonacci levels, or key psychological levels tend to be stronger.

Using Fair Value Gaps for Trailing Stop Loss (SL)

FVGs can be effectively used to set trailing stop-loss levels to maximize profit while reducing risk.

Common Mistakes When Trading FVGs

Ignoring Market Structure – Always align FVGs with the broader trend.
Using FVGs in Isolation – Combine with order flow, liquidity, and other confluences.
Overtrading Small Timeframes – Higher timeframes offer more reliable setups.

Enhancing FVG Analysis with Volume and Market Profile

Volume Profile Analysis – Check if FVGs align with high/low volume nodes.
Liquidity Zones – Identify liquidity pools near FVGs to anticipate reactions.
Institutional Order Flow – Watch for smart money movements within FVG zones.

Inverse Fair Value Gap (IFVG): A Deep Dive into Trading Strategy

The Inverse Fair Value Gap (IFVG) is a unique concept within smart money trading strategies that builds upon the traditional Fair Value Gap (FVG). While a regular FVG represents a price inefficiency that the market may revisit before continuing in its trend, an IFVG occurs when price action returns to fill an existing FVG but fails to sustain a reversal, instead continuing in the original direction.

This behavior signals strong market momentum and institutional interest in continuing the trend. Traders who recognize IFVGs can use them to filter out false reversals, confirm market direction, and enhance trade entries and exits.

In this article, we will cover:

What is an Inverse Fair Value Gap (IFVG)?
How to Identify IFVGs on a Chart
Using IFVGs for Trade Entries and Exits
Best Timeframes to Trade IFVGs
How to Use IFVGs as Support and Resistance
Common Mistakes to Avoid
Combining IFVGs with Liquidity Zones & Order Blocks

What is an Inverse Fair Value Gap (IFVG)?

An IFVG forms when price retraces to fill a traditional FVG but instead of reversing, it fails to reject the zone and continues in the original trend direction. This shows that the imbalance in price action has not led to a significant shift in market sentiment, confirming that the initial move was strong and backed by institutional traders.

This concept is critical in trend-following strategies because it acts as a confirmation that the market is likely to continue its original direction. IFVGs often align with areas of liquidity, stop-hunt zones, and institutional order flow.

How to Identify IFVGs on a Chart

Spotting an Inverse Fair Value Gap requires careful observation of price action and an understanding of traditional Fair Value Gaps (FVGs).

Step-by-Step Guide to Identifying IFVGs:

Find a Regular Fair Value Gap (FVG):
- Identify a strong impulse move with a visible three-candle structure.
- Mark the zone between the first and third candle wicks where price failed to trade efficiently.
Wait for a Retracement into the FVG:
- Observe price action as it moves back into the FVG zone.
- Look for signs of reversal or continuation.
Assess Price Reaction:
- IFVG Formation: If price enters the FVG but does not reject it strongly and instead continues in the original trend direction, an IFVG is confirmed.
- If price respects the FVG and reverses, then it is a standard FVG rejection, not an IFVG.
Mark the IFVG Zone:
- Draw a zone where price failed to reverse and continued in the original direction.
- This IFVG now acts as a continuation signal and potential support/resistance level.

Using IFVGs for Trade Entries and Exits

Inverse Fair Value Gaps are powerful tools for confirming trade setups and preventing premature exits.

1. Entry Strategy Using IFVGs

Traders can enter a position after an IFVG confirmation in two ways:

Breakout Entry:
- Once an IFVG is confirmed, traders can enter a position in the direction of the original move after a breakout of the IFVG zone.
- Stop-loss can be placed just above/below the IFVG.
Pullback Entry:
- If price slightly retraces after forming an IFVG, traders can wait for a minor pullback into the IFVG zone to enter with better risk-reward.

2. Exit Strategy Using IFVGs

Invalidation of an IFVG as an Exit Signal:
- If price fails to hold the IFVG zone and starts reversing, traders may exit the trade to avoid unnecessary losses.
- An IFVG being invalidated means the market is no longer favoring the trend continuation.
Using IFVGs for Trailing Stop Loss:
- Traders can trail their stop-loss behind newly formed IFVGs as price continues trending.
- If a new IFVG forms, adjust the stop-loss just beyond the IFVG zone to lock in profits.

Best Timeframes to Trade IFVGs

Different timeframes offer different trade opportunities based on IFVGs:

Higher Timeframes (1H, 4H, Daily)
- Best for swing traders looking for strong trend continuation signals.
- High probability of price respecting the IFVG zone.
Medium Timeframes (15M, 30M, 1H)
- Ideal for intraday traders seeking to capitalize on market inefficiencies within a session.
- IFVGs work well with liquidity grabs and institutional order flow strategies.
Lower Timeframes (1M, 5M)
- Suitable for scalpers who trade fast-moving price action.
- High occurrence of IFVGs, but requires additional confirmation (e.g., volume analysis).

Using IFVGs as Support and Resistance

Inverse Fair Value Gaps often act as dynamic support and resistance zones, depending on market structure.

Bullish IFVG (Support Zone)
- If an IFVG forms in an uptrend, it often acts as a support zone where price may react positively in the future.
- Future price retests of the IFVG could provide new buying opportunities.
Bearish IFVG (Resistance Zone)
- If an IFVG forms in a downtrend, it often serves as a resistance zone where price struggles to break through.
- Future price retests could be entry points for short positions.

Common Mistakes to Avoid When Trading IFVGs

Many traders misinterpret IFVGs, leading to poor execution. Avoid these mistakes:

Mistaking Normal FVGs for IFVGs
- An IFVG requires price to fail to reverse at an FVG, not simply test it.
- Confirmation is key before executing a trade.
Ignoring Market Structure
- Always align IFVGs with higher timeframe trends to avoid counter-trend trades.
Overtrading Small Timeframes
- IFVGs occur frequently on lower timeframes but require strong confluences (e.g., liquidity levels, order blocks) to be reliable.
Not Using Volume Analysis
- Low-volume IFVGs are weaker than high-volume ones.
- Use Volume Profile to validate IFVG strength.

Combining IFVGs with Liquidity Zones & Order Blocks

To increase the accuracy of IFVG trades, traders can combine them with:

Liquidity Grabs:
- If an IFVG forms near a liquidity pool, it increases the likelihood of price continuation.
Order Blocks:
- Institutional traders leave behind order blocks where they execute large orders.
- IFVGs forming within these blocks have a higher probability of success.
Fibonacci Retracements:
- IFVGs aligning with key Fibonacci levels provide additional confluence for high-probability trades.

Conclusion

The Fair Value Gaps & Inverse Fair Value Gap (IFVG) is a powerful trading tool that helps traders:

Confirm trend continuation after an FVG fails to reject price.
Improve entry & exit accuracy by avoiding false reversals.
Use FVGs and IFVGs as support/resistance for dynamic trading zones.

By combining FVGs/IFVGs with market structure, liquidity zones, and volume analysis, traders can make better-informed decisions and increase their trading success.

Introduction to Fair Value Gap (FVG)