Fair Value Gap (FVG)
30-Second Definition
A three-candle pattern representing a market imbalance where the middle candle moves rapidly, leaving a gap between the wicks of the preceding and succeeding candles.
Understanding Fair Value Gaps (FVG)
A Fair Value Gap (FVG) is an imbalance in price action that occurs when buying or selling pressure is so intense that price moves rapidly, leaving a visual gap on the chart.
Anatomy of an FVG
An FVG requires a three-candle sequence:
- Bullish FVG: The high of Candle 1 does not overlap with the low of Candle 3. The empty space in between is the bullish FVG.
- Bearish FVG: The low of Candle 1 does not overlap with the high of Candle 3. The empty space in between is the bearish FVG.
Trading Application
In the TradeGuardian Framework, we use FVGs as key areas of interest:
- Price Magnetism: Price frequently returns to fill or mitigate these gaps to resolve the structural market imbalance.
- Confluence: We search for entries when price sweeps session liquidity and enters a high-timeframe FVG.
Why It Matters
Understanding this concept is essential for maintaining strict risk management and surviving proprietary trading evaluations over the long term.
Visual Explanation
Real Trading Example
In a live trading environment, proper execution of this concept prevents emotional reactions. For example, if the market shifts aggressively during a New York session, relying on mechanical rules rather than intuition protects the account capital.
Common Mistakes
Common Mistake
Ignoring the rules: Many beginner traders fail because they abandon their pre-trade checklist the moment they face consecutive losses.
Professional Tips
Pro Tip
Mechanical Execution: Treat every trade as a simple execution of your mathematical edge. Over a sequence of 100 trades, individual emotional reactions are irrelevant.
FAQ
Is this allowed in prop firms? Yes, understanding and applying this concept is completely aligned with prop firm rules.
How long does it take to master? It requires consistent journaling and backtesting, typically taking several weeks of dedicated practice.
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