ICT — Fair Value Gap (FVG)
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Sep 28, 2023
ICT Mentorship Core Content — Month 04 — Video 12 — ICT Fair
Value Gaps FVG
This article is dedicated to the study of ICT Fair Value Gaps
Before getting to the heart of the matter, it is important to understand
that ICT’s philosophy is based on two fundamental concepts: Market
liquidity and Market inefficiency. In other words, what moves the
price is the fact that it is constantly seeking liquidity (Buy-side/Sell-side
liquidity), or resolving market inefficiencies or imbalances. Market
imbalance is a situation resulting from an excess of buy or sell orders ,
making it impossible to match the orders of buyers and sellers. One
such phenomenon that reveals this Market imbalance is the fair
value gap (FVG).
Tweet of ICT — Feb 2, 2023
I — Understanding the Fair Value Gaps Concept :
The official definition of FVG can be found in ‘ICT Mentorship Core
Content — Month 04 — Video 12’ :
‘Fair Value Gap is a range in Price Delivery where one side of the
Market Liquidity is offered and typically confirmed with a
Liquidity Void on the Lower Time Frame in the same range of
price. Price can actually ‘gap’ to create a literal vacuum of
trading thus posting an actual Price Gap’ .
The ICT FVG is a particular price pattern observed within a three-
candle sequence on a price chart. It is characterized by a large central
candle surrounded by neighboring candles with upper and lower
wicks that do not fully overlap the range of the large candle. This
configuration signals a swift price surge or decline that transpires so
rapidly that buyers or sellers cannot effectively counteract it, resulting
in a market imbalance.
ICT FVG usually happens within the ‘Displacement’. In fact, after the
price reaches a liquidity level (old high/low, run on liquidity pools or
turtle soup) and then reverses, a very powerful move in price action
resulting in strong selling or buying pressure will occur. This
aggressive move in price is called ‘Displacement’. Generally speaking,
displacement will appear as a single or a group of candles that are all
positioned in the same direction. These candles typically have large
real bodies and very short wicks, suggesting very little disagreement
between buyers and sellers.
Bearish and Bullish FVG
II — Buyside Imbalance Sell-Side Inefficiency (BISI)
A bullish FVG is a BISI. A BISI is made up of 3 consecutive candlesticks
:
1- The high of the first candle is the FVG low
2- The second candle is a displacement in price
3- The low of the third candle is the FVG high
Buyside Imbalance Sell-Side Inefficiency (BISI)
Buyside Imbalance Sellside Inefficiency (BISI) because during the
second candle there is only buyside offered to the market so there’s a
Buyside Imbalance and because there’s no Sellside being offered
there’s a Sellside Inefficiency.
GBP/USD — BISI
III — Sellside Imbalance Buyside Inefficiency (SIBI)
A bearish FVG is a SIBI. A SIBI is made up of 3 consecutive candlesticks
:
1- The low of the first candle is the FVG high
2- The second candle is a displacement in price
3- The high of the third candle is the FVG low
Sellside Imbalance Buyside Inefficiency (SIBI)
Sellside Imbalance Buyside Inefficiency (SIBI) because during the
second candle there was only sellside offered to the market so there’s a
Sellside Imbalance and because there is no buyside being offered
there’s a Buyside Inefficiency.
EUR/USD — SIBI
IV — The CONSEQUENT ENCROACHMENT (C.E)
The consequent encroachment is simply the midpoint or 50%
equilibrium level of a FVG.
A — Sellside Imbalance Buyside Inefficiency (SIBI)
In the case of SIBI, the C.E can play the role of a resistance level, and
ideally the price should close below the C.E. Keep in mind that a
candle whose body closes above the FVG high renders this bearish
FVG invalid (this situation is called Fair Value Gap Inversion as the
bearish FVG becomes a support level for the price)
B — Buyside Imbalance Sellside Inefficiency (BISI)
In the case of BISI, the C.E acts as a support level, and ideally the
price should close above the C.E. Keep in mind that a candle whose
body closes below the FVG low renders this bullish FVG invalid (this
situation is called Fair Value Gap Inversion as the bullish FVG
becomes a resistance level for the price)
The CONSEQUENT ENCROACHMENT (C.E)
Fair Value Gap Inversion
