FVG Indicator is a smart money concept indicator that displays price imbalances on one side of the market with alerts. Financial markets are complex arenas where many factors determine prices. As traders and investors look for new ways to get an edge in the markets, the use of technical indicators has increased. Among these, the Fair Value Gaps (FVG) Indicator is a fascinating tool to detect market inefficiencies, imbalances in the market, or when the buying and selling are not equal. Let’s dive into how this Smart Money indicator works on MT4 and MT5 charts.
The FVG indicator is designed to highlight fair value gaps on MT4 & MT5 charts. The indicator can send alerts via popups, push notifications, and email, immediately informing traders of these crucial price movements.
Understanding Fair Value Gaps
Before delving into the technicalities of the indicator, it’s essential to understand what Fair Value Gaps (FVG) are. FVGs are essentially price imbalances on one side of the market. They’re also known as ‘price imbalance’ or ‘market inefficiency’. The fundamental idea is that prices move to seek liquidity, as the market aims to pair orders (both buys and sells) in equal balance. This drive for balance ensures market efficiency.
In an efficient market, there’s an equal balance of buyers and sellers. When this balance is visible, it’s characterized by an overlap of candle bodies or wicks on a price chart. However, when the price abruptly shifts away from an order block, leaving behind a visible gap, an FVG is created. Such gaps indicate the maneuvers of the market’s ‘smart money’ or institutional traders.
This Smart Money Indicator isn’t a standalone trading indicator System. Still, it can be very useful for your trading as additional chart analysis, to find trade exit position(TP/SL), and more. While traders of all experience levels can use this system, practicing trading on an demo account can be beneficial until you become consistent and confident enough to go live. You can open a real or demo trading account with most Forex brokers.
Understanding this Smart Money Indicator
Fair Value Gaps manifest as a price imbalance on one side of the market, often referred to as a ‘price imbalance’ or ‘market inefficiency’. The core philosophy behind FVG is that prices move to seek liquidity. The market is in a perpetual quest to pair orders (buys and sells) in balanced harmony. Since Smart Money Indicator players handle enormous sums, they scatter orders across every conceivable pip.
Market Efficiency
Market efficiency is attained when there is an equal balance of buyers and sellers. This is typically visualized by overlapping candles (either their bodies or wicks). The more the overlap, the more efficient the market is deemed to be.
When does an FVG occur?
An FVG occurs when the price diverges quickly from an order block. Such a move indicates that the ‘smart money’ is at play. To spot a Fair Value Gap, look for an area of market inefficiency (a lone green candle without a red counterpart or vice versa). If the candles on either side, including their wicks, fail to close these gaps, an FVG has likely formed.
It’s worth noting that markets may not immediately address these inefficiencies. Especially on larger timeframes, the resolution can stretch from days to even years. However, on intraday and scalping timeframes, corrections are often swift.
How to Interpret an FVG?
Typically, an FVG should maintain the 50% level. Prices often react between the opening and the midpoint (50%) of the FVG. When the price fills the entire gap, it might be targeting the order block either above or below the FVG.
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How it’s Used in Trading
FVGs can suggest potential support or resistance levels. When a gap is closed (filled), a price reversal might occur. Traders employing strategies that bet against prevailing trends (contrarian) or those who follow trends can use FVGs. A bullish FVG suggests a potential long position; a bearish FVG suggests a potential short position.
Refining the Signal
The size of a gap can indicate the strength of the imbalance. The “Threshold %” setting allows traders to filter gaps based on their height. An “Auto” setting simplifies this by using a calculated threshold to identify more significant gaps.
Input Parameters:
- Threshold % – Filters gaps by size.
- Auto Threshold – Automatically sets the gap size filter.
- Unmitigated Levels – Displays extended levels for unfilled gaps.
- Mitigation Levels – Shows progress on previously filled gaps.
- Timeframe – Selects the data period used for FVG detection.
Beyond the Initial Gap
The indicator defaults to showing only unfilled gaps. However, it allows users to also track how much of a previously filled gap has been “mitigated”, meaning how much the price has moved past the original gap. A “Dynamic” setting allows for ongoing monitoring of mitigated gaps.
Conclusion
The Fair Value Gaps Indicator for MT5/MT4 is a dynamic tool for traders looking to harness the power of market inefficiencies. Offering a visual representation of price imbalances and providing customizable alert options ensures that traders don’t miss out on potential trading opportunities arising from these gaps. Whether you’re a seasoned trader or just getting started, the FVG indicator is worth exploring to refine your trading strategies.
