Easy Way to Identify and Confirm Fair Value Gap. Valid & Invalid FVG Explained (Forex Trading SMC)
- VasilyTrader
- 5 hours ago
- 3 min read
Most of Fair Value Gaps that you identify are false.
The problem is that the common definition of a FVG— three candles, a gap in the middle—isn't enough.
If you're not looking at the context behind the gap - you're not trading the FVG, you are likely trading a trap.
In this article, I'll show you the exact strategy to confirm whether an FVG is real or false.
What is Fair Value Gap FVG
First, let's start with a definition of Fair Value Gap.
A Fair Value Gap represents a zone on a price chart where a significant and rapid price rise occurred.
No trading or very little trading occurred within that zone.
Such a zone will signify market inefficiency.
FVG leaves behind "unfilled orders".
Price will eventually return to "fill" or rebalance this gap, providing trading opportunities for retail traders.
How to Identify Fair Value Gap
To confirm a Fair Value Gap, traders typically use the following models.
Bullish FVG Model
A mainstream method to identify a bullish FVG is based on 3-candle pattern where the middle candle is a strong bullish candlestick, the wicks of the first candle and the third one do not overlap.
The area from the high of the first candle to the low of the third candle will be a bullish fair value gap.
Bearish FVG Model
A bearish FVG will be based on 3-candle model with a strong bearish candlestick in the middle, where the wicks of the first and third candles do not overlap.
Bad Models
The problem with these 2 models is that they are not accurate.
A lot of regular, efficient price movements would fit in that category.
These models will simply mislead you, indicating a lot of wrong fair value gaps.
How to Confirm Valid/Invalid Fair Value Gap
The good news is that there is an efficient way to empower these models, making them way more precise.
The one extra confirmation layer I suggest using is multiple time frame analysis.
Let me explain.
To confirm a fair value gap, we need to make sure that very little trading activity occurred within that zone and that it is inefficient.
Lower time frame analysis will help us assess a trading activity within a potential fair value gap.
Invalid Bearish FVG Example
According to common rules, this bearish Fair Value Gap on GBPUSD on an hourly time frame is valid.
However, 15 minutes time frame analysis shows that the market was efficient within that zone.
The majority of the price levels within this FVG were traded by the buyers and by the sellers.
So this FVG is invalid.
And the market never filled that.
Confirmation Time Frame
But what time frame to choose for validation?
I suggest using a time frame that is 4 times lower.
For example, if you spotted a FVG on a 4H time frame, validate that on an hourly time frame.
IF you see FVG on an hourly, check 15 minutes time frame then.
As an exception, for a validation of a FVG on a daily, you can use 4H time frame.
Invalid Bullish FVG Example
Check a potential bullish FVG on EURUSD Forex pair on an hourly time frame.
While from 3-candle model perspective, it looks like a perfect Fair Value Gap with one-sided buying imbalance.
However, 15-minutes time frame analysis reveals that the price moved up and down, filling almost every single price level within that zone.
The chart looks "smooth" and efficient.
So this Fair Value Gap is Invalid.
And as you can see, it wasn't filled.
Valid Bearish FVG Example
Look at a bearish Fair Value Gap on USDJPY on a 4h time frame.
The hourly time frame analysis confirms inefficiency and aggressive selling.
That fair value gap is valid, and the market successfully filled that.
Valid Bullish FVG Example
Now, let's check this potential bullish FVG on EURGBP Forex pair on a 4h time frame.
To confirm that the imbalance was left within that zone and that the price moved too quickly within, we check an hourly time frame.
On an hourly chart, we see a rapid price movement and very little trading activity within that area.
So this FVG is valid.
And the market successfuly filled that.
Summary
Examining what happens within a potential Fair Value Gap provides the edge in understanding the behavior of the market participants.
This simple method will help you expose fake fair value gaps FVG and identify the most powerful ones in trading Forex or any other market.
