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A day trading market maven known as Michael J. Huddleston, who goes by the internet name of ICT, Inner Circle Trader, “The Ghost in the machine” has a few worth noting concepts that he uses to analyze trades and executions, today we will explore the Fair Value Gap. FVG for short.
To start, what is a “Fair Value Gap” (FVG)?
Lets start assuming you know the basic of trading and technical analysis and the anatomy of a “candlestick”.
In short, a fair value gap is part of a 3 candle pattern formation. The first candles high, does not touch the third candles low. The distance between the first and third candles high and low on the second candle is the fair value gap.
Can you spot the FVG area on the second candle?
That is the FVG. The Fair Value Gap.
There are two types of Fvg’s.
In this example, we refer this one as a “BISI”
Buy side imbalance, sell side inefficiency.
Meaning we have more buy orders, than there are sell orders. Think of it of as skewed distribution. Skewed for buyers. Buyers are aggressively lifting price, taking liquidity at the ask side.
“SIBI” is the opposite.
Sell side imbalance, buy side inefficiency.
SIBI is the first candles low, and third candles high, and the second candle contains the SIBI fvg.
Marking all the fvg’s out, we can see the occurrences of fvg happen more times than not. From this point on , we can visually start to see, that price does have a pattern in how it reacts to these areas of fvg’s.
Lets extend the bars to see how price reacts to it.
We can see price has an interesting reaction with fvg’s. It tends to act as areas of support or resistance.
Understanding and identifying FVGs, whether BISI or SIBI, can be a powerful tool in a trader’s arsenal. The key lies in not just recognizing these gaps but also in understanding the context in which they appear. Here are a few strategic applications:
FVGs can provide insightful entry and exit points. For instance, entering a trade at the closure of a BISI gap with an upward trend can be a strategic entry point, while the appearance of a SIBI might signal an opportune moment to exit or take a short position. While FVGs can be indicative of market movements, they should be used in conjunction with other trading strategies and a robust risk management framework. This ensures that decisions are not solely based on one indicator but are backed by a comprehensive analysis. The chart examples demonstrate how FVGs occur frequently. Historical analysis of these occurrences can provide insights into how markets have reacted in the past, offering a blueprint for future strategies.
The Fair Value Gap, in its dual forms of BISI and SIBI, offers a nuanced view of market imbalances and inefficiencies. As ICT teaches, understanding these concepts can lead to more informed trading decisions. However, it’s vital to remember that no single tool provides all answers in the complex world of trading. A balanced approach, combining FVG analysis with other methods and sound risk management, is key to effective trading.
The best way to get better at recognizing these fvg’s is to look for them on the various timeframes. They appear on all assets and all time frames. Typically the higher timeframes will be more prominent than the lower time frames. The examples above we gave are on the 5 minute, each candlestick duration is 5 minutes before a new candle will show up and form.
