How to Trade Fair Value Gaps

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Originally published at: How to Trade Fair Value Gaps

The article on Fair Value Gaps is the opinion of Optimus Futures, LLC. Fair Value Gaps (FVGs) are price jumps due to imbalanced buying and selling pressures, viewed by traders as opportunities amidst market uncertainty. FVGs can be spotted on charts as large candles not fully overlapped by the wicks of neighboring ones, differing from small gaps that don’t show significant buying/selling imbalances. Trading strategies for FVGs involve buying/shorting the gap, using FVGs as support/resistance levels, and implementing various indicators and stop losses. What Are Fair Value Gaps? A Fair Value Gap (FVG) as it’s often referred to, is basically…

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Hi, @Mod-MattZ , how are you?

Thank you for this insightful article on fair value gaps. It provides a clear understanding of how to identify and trade these opportunities. The strategies described, especially the use of FVGs as potential support/resistance levels, seem especially useful.

What indicators do you consider most effective when trading with the FVG? and what is the best way to set stop losses to manage risk in these scenarios? I imagine that for longs it will be a few ticks below the candlestick FVG and for shorts the opposite.

I will try to train my eyes to see if I can identify them in the market :).

Regards.

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Thanks for the article. It was interesting read.
I have a comment about the images on these type of articles. I don’t know if anyone has noticed, but whenever you click on the article images to expand them, what pops up is the same small thumbnail and not an enlarged version. It was the same with the MACD article.

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Thank you for your questions @fermilans.
When trading around Fair Value Gaps, certain indicators can enhance your strategy. Here are some commonly used ones:

  1. Volume Indicators: To confirm a Fair Value Gap, volume indicators like the Volume Profile or On-Balance Volume can be crucial. They help in identifying the strength of the move and whether there is sufficient market interest in these price levels.
  2. Moving Averages: Simple or exponential moving averages can provide insight into the prevailing market trend. When a Fair Value Gap occurs, the position of the gap in relation to these averages can indicate potential future movements.
  3. Momentum Oscillators: Tools like the Relative Strength Index (RSI) or the Stochastic Oscillator can indicate over bought or oversold conditions. This information can be valuable when deciding how to trade a Fair Value Gap.
  4. Support and Resistance Levels: Identifying key support and resistance levels around the Fair Value Gap can offer insights into potential reversal points or areas of price consolidation.
  5. Fibonacci Retracement Levels: These can be used to identify potential reversal levels or targets for the price after a gap has occurred.
  6. Market Sentiment Indicators: Understanding the overall market sentiment can also be beneficial. Indicators like the Fear & Greed Index or Put/Call ratios can provide additional context to the trading environment.

Remember, while indicators can provide valuable insights, they should be used in conjunction with a comprehensive trading strategy and not relied upon exclusively. Each trader’s approach to using these indicators may vary based on their trading style and risk tolerance.

Regarding “stops,” determining the appropriate approach is highly dependent on your specific method and its context. There is no definitive “correct” or “incorrect” way to do this in my opinion. However, in my opinion, each stop and target should reflect where you have taken advantage of a market anomaly or where the market is indicating that your position is incorrect.

Best,
Matt Z
Optimus Futures

There is a substantial risk of loss in futures trading. Past peformance is not indicative of future results.

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Hi @Ariesfx13
Every article we publish on the community provides a link to the blog itself.
It’s at the top of the artcile. The pics at the blog should own as they are intended.
We hope this helps.

Best,
Matt Z
Optimus Futures