In trading, both Fair Value Gaps (FVGs) and Order Blocks are key concepts used in technical analysis, particularly in Smart Money Concepts (SMC). Fair value gaps are market inefficiencies that occur when buying and selling activities are unbalanced. These gaps manifest as a three-candlestick pattern, where rapid price movement creates a space between the first and third candles, effectively ignoring the middle candle.
In the context of forex trading, Order Blocks signify a shift in price delivery, validated by these fair value gaps. On a forex chart, a bearish order block is identified by the last bullish candle preceding a downtrend, marking the highest high before the price drops. Conversely, a bullish order block is indicated by the last bearish candle before an uptrend, representing the lowest low before the price rises.
These order block areas are crucial as they highlight where major market participants and large financial institutions have placed their orders, whether as sell limits, buy limits, or pending orders. Understanding these concepts can enhance trading strategies and improve decision-making in the forex market. This revision aims to clarify your points while maintaining a unique voice. Let me know if you need further adjustments!
What does FVG mean in trading?
In trading, FVG stands for Fair Value Gap. It refers to an imbalance or gap in price action that occurs when there’s a sharp move in the market, often caused by a significant influx of buy or sell orders. The concept of FVG is particularly used in price action trading, especially within certain trading strategies like Smart Money Concepts (SMC).
How Fair Value Gaps Work:
- Imbalance in Order Flow: When the market moves too quickly in one direction, certain price levels don’t get traded as much, leaving a gap. This creates an imbalance between buyers and sellers.
- Market Filling the Gap: Many traders believe that over time, the market will “fill” these gaps, returning to the levels where fewer transactions occur to balance the order flow.
- Price as a Magnet: The fair value gap can act as a target for price to retrace before continuing its trend, as the market seeks to “revisit” areas where liquidity may have been left behind.
- Example: If there is a strong bullish move, the price might leave a gap between the previous low and the following high. Traders expect the market to come back and “fill” this gap before resuming its movement.
- How it Forms: An FVG occurs when a three-candlestick pattern forms with a large move in the middle candle. The gap exists between the high of the first candle and the low of the third candle (in a bullish case) or between the low of the first candle and the high of the third candle (in a bearish case). you can refer to a detailed guide on fair value gap trading strategy to learn more.
Practical Use of Fair Value Gaps:
Traders often watch for FVGs as potential areas where price may retrace before resuming the previous trend, making them useful for predicting retracements, reversals, or entries/exits in trades.
Order Blocks:
- Definition: An Order Block is the last bullish or bearish candle before a significant price reversal or move. It represents areas where institutional traders (often referred to as “smart money”) have placed large orders. Order blocks are essentially supply or demand zones that mark where large institutions entered or exited the market.
- How it Forms: In a downtrend, the last bullish candle before a major bearish move is considered a bearish order block. Conversely, in an uptrend, the last bearish candle before a major bullish move is called a bullish order block.
- Usage: Traders look for price to revisit these areas as zones of liquidity where the institutions may have left unfilled orders, and where price is likely to react (either reversing or continuing the trend). They are often used as support and resistance zones.
- Example: If price rallies after a small bearish candle, that bearish candle is a bullish order block. Traders anticipate that when the price comes back to this area, it will likely act as support and trigger a bounce or continuation. You can refer to the order blocks in Forex, a detailed guide to learn more.
Key Differences:
- Nature of the Price Imbalance:
- FVG: This represents an area where the market hasn’t properly traded due to an aggressive price movement. It’s a price gap in the market structure.
- Order Block: This represents the area where large orders were placed by institutions, often leading to significant price moves. It’s a zone of support or resistance created by institutional buying or selling.
- Formation:
- FVG: Formed by three-candle patterns showing an imbalance in price.
- Order Block: Typically the last opposing candle (bullish or bearish) before a significant market reversal.
- Purpose:
- FVG: A potential retracement area where the price may return to fill the imbalance.
- Order Block: A key area of liquidity and institutional interest, which can act as a strong support or resistance zone for future price movements.
fair value gaps vs order blocks Usage in Trading:
- Traders often combine both FVGs and Order Blocks to identify high-probability setups. For example, if a Fair Value Gap overlaps with an Order Block, it increases the likelihood that the price will react to that Level.
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fair value gaps vs order blocks FAQs and Tips
Does the Fair Value Gap Work?
Yes, Fair Value Gaps (FVGs) can be extremely effective, but their success largely depends on the trader’s ability to interpret market structure and identify the right conditions. FVGs do not operate in isolation; they require a deep understanding of institutional order flow, liquidity, and context within the overall trend.
Are Fair Value Gaps Always Filled?
Yes, Fair value gaps are usually filled, but the timing can be uncertain. While price eventually seeks to balance inefficiencies, the market may take longer than expected to revisit these areas. Patience is key here. The underlying reason is that order blocks and unfilled orders don’t expire—they remain valid until the market finds liquidity to rebalance those areas.
Is the Fair Value Gap the Same as an Imbalance?
Theoretically, both represent inefficiencies in price, but they are different concepts in practice. FVG is a specific form of imbalance identified within a three-candle pattern, while an imbalance can refer to any price area where the trade flow is unbalanced. Visually, FVGs have a clear gap in price action, whereas imbalances may not always form such a distinct pattern.
Which Fair Value Gap to Use?
Fair Value Gaps that align with institutional order flow and the prevailing market structure are the most reliable. In a bearish setup, look for FVGs above equilibrium for entry points, and for a bullish setup, focus on FVGs below equilibrium. The key is to combine the FVG with the trend direction and broader market behavior.
When Is a Fair Value Gap Invalidated?
An FVG is invalidated once price has filled the gap and no longer offers the liquidity imbalance it once did. Also, if the gap contradicts your overall market bias—if price moves strongly against your directional view—the FVG loses its predictive power. Remember, context matters.
When Is a Fair Value Gap Mitigated?
A Fair Value Gap is mitigated when price enters the gap and traders or institutions execute their pending orders in that zone. Mitigation happens as the market absorbs the liquidity in the gap, and price usually shows a reaction—either reversing or continuing in the same direction based on the new balance of buy and sell orders.
How Long Are Fair Value Gaps Valid?
There’s no expiration on Fair Value Gaps. They remain valid indefinitely until price reenters and fills the gap. The market doesn’t care about time in these cases—liquidity is what drives the move. However, relevance may diminish if the gap becomes outdated compared to more current market structures.
which order block to use?
use order blocks that are validated by a fair value gap and align with your directional bias.
fair value gaps vs order blocks summary:
- FVG is a price gap caused by imbalances, often expected to get “filled.”
- Order Blocks are institutional zones of buying or selling, often seen as areas of support or resistance.
Both concepts focus on price imbalances but approach them from different perspectives.
