A Fair Value Gap (FVG) is a price action phenomenon typically illustrated using three consecutive candles, where the wicks of the two outer candles do not meet or overlap with the wick of the middle candle. It represents a range in price delivery where only one side of market liquidity is offered and is often confirmed by a liquidity void on lower time frame charts within the same price range. Price can "gap," creating a literal vacuum in trading and resulting in an actual price gap. This occurs when price moves away from a specific level with minimal trading activity, producing a one-directional price movement.
The key point in identifying FVGs is that the gap is only calculated by the impulse up or down candle,
and the candles on either side of that move. Everything else does not contribute towards that gap.
A Liquidity Void is a range in price where one side of market liquidity is displayed through wide or extended one-sided ranges or candles. It occurs when the market moves aggressively away from a consolidation, creating a void in buy-side liquidity. This indicates that very little buying occurred during the price movement. The nature of a liquidity void is such that, with a high probability, price will eventually retrace and trade through the same price levels that were previously lacking liquidity. The idea behind Fair Value Gaps (FVGs) is that the market will ultimately return to these inefficiencies before continuing in the direction of the original impulsive move. FVGs are significant because they can provide traders with a market edge. Price action traders can also use these imbalances as entry or exit points in the market.
A Bullish FVG is a BISI (Buyside Imbalance and Sellside Inefficiency). A FVG is formed by three consecutive candlesticks. In a BISI, it begins with the high of candle #1, which marks the FVG low, and ends with the low of candle #3, which marks the FVG high. A bullish FVG is created when the low of candle #3 does not overlap the high of candle #1. This occurs due to a displacement in price caused by candle #2. It is referred to as a Buyside Imbalance Sellside Inefficiency (BISI) because, during candle #2, only buyside liquidity is offered to the market, creating a buyside imbalance. Simultaneously, the absence of sellside liquidity results in a sellside inefficiency.
A Bearish FVG is a SIBI (Sellside Imbalance and Buyside Inefficiency). A SIBI starts at the low of candle #1, which is the FVG High, and ends at the high of candle #3, which is the FVG Low. A Bearish FVG is created when the high of candle #3 doesn't overlap the low of candle #1. This occurs due to the displacement caused by candle #2. It is called a Sellside Imbalance Buyside Inefficiency (SIBI) because, during candle #2, only sellside liquidity was offered to the market—resulting in a Sellside Imbalance—and since no buyside liquidity was present, there is a Buyside Inefficiency.
Inverted FVG - When price uses a SIBI (Bearish FVG) as support, and when price uses a BISI (Bullish FVG) as resistance—in other words, inverted FVGs are failed Fair Value Gaps that get retraced into later in price. We consider an Inverted FVG only when:
1. A Bullish FVG formed inside Premium Zone (above Equilibrium).
2. A Bearish FVG formed inside Discount Zine (below Equilibrium).
2. A Bearish FVG formed inside Discount Zine (below Equilibrium).
Most of the time, a Bullish FVG formed inside the Premium Zone will fail to give a reaction when price returns to that FVG. Ideally, we want to see price move lower and then bounce back into this FVG to continue the sell-off. In this case, the Bullish FVG becomes resistance—and I would say, strong resistance. The same applies to a Bearish FVG formed inside the Discount Zone: we want to see price trade higher, break through this FVG (making it invalid), then retest the zone and continue moving upward. This FVG then becomes a support zone.
Implied Fair Value Gap — It utilizes two wicks and their respective Consequent Encroachment. An Implied Fair Value Gap (IFVG) is an imbalance formation consisting of three candles, as conceptualized by ICT. It involves identifying a larger candle body and measuring the average between the two adjacent candle shadows.
Implied Fair Value Gap — It utilizes two wicks and their respective Consequent Encroachment. An Implied Fair Value Gap (IFVG) is an imbalance formation consisting of three candles, as conceptualized by ICT. It involves identifying a larger candle body and measuring the average between the two adjacent candle shadows.
Criteria:
1. Big range candle.
2. Does NOT have a FVG.
3. Candles on either side have long wicks that overlap “Implied FVG”.
2. Does NOT have a FVG.
3. Candles on either side have long wicks that overlap “Implied FVG”.
Steps:
1. Find Consequent Encroachment of left candles lower wick.
2. Find Consequent Encroachment of right candles upper wick.
3. Space between C.E. wicks is “Implied FVG”.
2. Find Consequent Encroachment of right candles upper wick.
3. Space between C.E. wicks is “Implied FVG”.
A Balanced Price Range — is the common area between two opposite Fair Value Gaps when they overlap. This overlapping of FVGs is called a double FVG. A BPR results from an aggressive move up immediately followed by an aggressive move down, or vice versa. What remains after either of these instances is essentially a double Fair Value Gap, which can act as a magnet for price before a continuation move higher or lower.
You must have a higher time frame (HTF) Point of Interest. Don’t enter a trade solely based on the presence of a BPR if you don’t know the bias for the day. ICT states that, in order for price to become a Balanced Price Range, it must trade through both directions of the price window. As you can see, price traded through the overlapping gaps—rebalancing and redelivering—creating a Balanced Price Range. Once redelivery occurs, expect price to move aggressively away from the gap.
You must have a higher time frame (HTF) Point of Interest. Don’t enter a trade solely based on the presence of a BPR if you don’t know the bias for the day. ICT states that, in order for price to become a Balanced Price Range, it must trade through both directions of the price window. As you can see, price traded through the overlapping gaps—rebalancing and redelivering—creating a Balanced Price Range. Once redelivery occurs, expect price to move aggressively away from the gap.
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