Fair Value Gap (FVG)

Fair Value Gap (FVG) is a concept that has gained significant traction among traders looking to identify inefficiencies in the market. Understanding FVGs can help traders spot potential opportunities and make informed decisions. Whether you are new to trading or have some experience, leveraging tools like Bajaj Broking’s Demat and Trading Account can simplify your journey into understanding complex market dynamics. With zero-cost account opening and quick digital setup, Bajaj Broking empowers traders to access the markets seamlessly.

A Fair Value Gap (FVG) refers to an imbalance in price action that occurs when market activity fails to fully account for supply and demand. This gap typically appears on candlestick charts when the price moves rapidly in one direction, leaving a void or inefficiency in the market. For example, if a stock’s price jumps significantly due to high buying pressure, the gap between the opening and closing prices of consecutive candles may indicate an FVG.

Such gaps are often interpreted as areas where the market may return to ‘fill’ the imbalance, offering traders opportunities to predict price movements.

Identifying a Fair Value Gap requires analysing candlestick charts. Follow these steps to spot FVGs:

1. Examine price movement: Look for areas where price moves sharply in one direction, leaving gaps between consecutive candles.
2. Focus on three-candle patterns: FVGs often appear when the middle candle’s range does not overlap with the previous and subsequent candles.
3. Use technical indicators: Tools like volume analysis can help confirm whether the gap is driven by significant market activity or temporary inefficiencies.

Fair Value Gaps serve as critical points for traders to strategise their entry and exit points. Here are some common ways traders utilise FVGs:

• Predicting reversals: Traders often view FVGs as areas where the price may reverse or retrace to fill the gap.
• Identifying imbalances: By recognising gaps, traders can pinpoint inefficiencies and anticipate market corrections.
• Risk mitigation: FVGs can act as indicators of potential price stability, allowing traders to adjust their stop-loss and take-profit levels accordingly.

For instance, a trader might notice an FVG in a stock’s price chart following a sharp upward movement. They could then plan to enter a short position, expecting the price to retrace and fill the gap.

Consider an example involving a stock that experiences a sudden price surge due to positive earnings reports.

• Initial movement: The stock’s price jumps from Rs. 1,000 to Rs. 1,200 in a single trading session.
• Gap formation: On the candlestick chart, the middle candle shows a large gap between its opening and closing prices, with no overlap with the previous or subsequent candles.
• Market reaction: Over the next few sessions, the price retraces to Rs. 1,100, partially filling the gap as the market adjusts to the imbalance.

Such scenarios highlight the importance of recognising FVGs as opportunities for strategic trading. With Bajaj Broking’s digital setup, traders can access real-time market data and act swiftly on such insights.

Fair Value Gaps are not restricted to equity markets; they occur across various asset classes, including forex, commodities, and cryptocurrencies.

• Equities: FVGs in stocks often result from earnings announcements, mergers, or macroeconomic events.
• Forex: Currency pairs can experience FVGs due to geopolitical developments or interest rate changes.
• Commodities: Sudden shifts in supply and demand, such as oil shortages, can create FVGs in commodity markets.
• Cryptocurrencies: High volatility in digital assets often leads to significant FVGs, especially during major news events or regulatory changes.

Understanding how FVGs behave in different markets allows traders to diversify their strategies effectively. Bajaj Broking’s tools and resources make it easier to navigate these markets with confidence.

Trading Fair Value Gaps can be rewarding, but it comes with risks. Here are some considerations:

• Rewards: FVGs offer opportunities to capitalise on market inefficiencies, potentially leading to profitable trades.
• Risks: Predicting whether a gap will be filled requires careful analysis, as market conditions can change rapidly.
• Strategic tools: Leveraging resources like Bajaj Broking’s Margin Trading Facility can help traders manage capital effectively and reduce risks.

Ultimately, whether you should trade FVGs depends on your risk appetite and trading experience. Bajaj Broking’s SEBI-compliant platform ensures reliability and safety, empowering traders to make informed decisions.

Fair Value Gaps are a powerful tool for understanding market inefficiencies and identifying trading opportunities. By learning how to spot and utilise FVGs, traders can enhance their strategies and improve their decision-making process. Bajaj Broking simplifies this journey with its zero-cost Demat and Trading Account, offering advanced tools and resources to help traders succeed. Start your trading journey today with Bajaj Broking and explore the potential of Fair Value Gaps in achieving your financial goals.

Fair Value Gaps form due to sudden shifts in market liquidity or significant buying and selling pressure. These imbalances can occur for several reasons:

• High volatility: When news events or economic data cause sharp price movements, the market may fail to account for all orders, creating gaps.
• Institutional trading: Large trades executed by institutional investors can lead to price inefficiencies.
• Market sentiment: Overwhelming bullish or bearish sentiment can accelerate price movements, leaving gaps unfilled.

Understanding these causes helps traders anticipate how the market might respond to such inefficiencies in the future.