Analysis and Application Strategies of FVG Types in Trading

FVG (Fair Value Gap) represents the blank space left in financial instruments during rapid price movements. These gaps often reveal shifts in market sentiment and clues about future price trends. Mastering the different manifestations of FVG is an essential core skill for technical analysis traders.

The Core Mechanism of FVG — Market Logic Behind Gap Formation

When market sentiment changes dramatically, prices jump over certain levels and move forward, forming obvious FVGs on the chart. What does this phenomenon reflect? Simply put, it indicates a sudden imbalance of buying and selling forces.

The formation of FVG typically requires three key conditions: First, a significant price jump—the opening price of the day deviates noticeably from the previous day’s close, rather than a slow progression; Second, an identifiable gap—a price range between two candles with no trading; Third, accompanying volume change—trading volume should increase during the gap formation, indicating heightened market participation.

Understanding these three elements helps you quickly assess the authenticity and potential impact of an FVG.

Trend Continuation Signals — Uncontrolled FVG and Midpoint FVG

When the market enters a strong trend, FVGs often help confirm the trend’s strength.

Uncontrolled FVG appears within an established trend, characterized by prices continuing along the existing direction, with the gap not being quickly filled. These FVGs usually have moderate volume, indicating sufficient market momentum. The key to identifying it is ensuring the gap occurs within a clear trend, and that prices continue in the original direction after the gap. Traders often use the size of uncontrolled FVGs to estimate how far the trend can go.

Midpoint FVG behaves similarly but appears at a more specific location—often near the 50% point of the trend from its start to the current position. This occurrence has psychological significance, indicating the trend has enough momentum to continue. The method to identify it is to observe whether there is a noticeable gap near the midpoint of the price movement, and whether prices continue after the gap.

Both types of FVGs are strong confirmations of trend continuation signals, telling you not to rush into counter-trend positions.

Reversal Warning — Exhausted FVG and Island Reversal FVG

Not all FVGs indicate continuation; some serve as warning signs of an impending trend reversal.

Exhausted FVG appears at the end of long or steep trends, often accompanied by a significant decrease in volume. After a period of strong upward or downward movement, the last FVG often signals that market participants’ strength is waning. Recognizing it involves observing whether the trend has covered a considerable distance, whether volume has shrunk compared to the initial phase, and whether reversal signals appear after the gap. Once confirmed, a cautious approach is to reduce positions or prepare for a reversal.

Island Reversal FVG is a more powerful reversal signal. It consists of two gaps: the first in the trend’s direction, followed by a brief sideways consolidation, then a second gap in the opposite direction, forming an isolated “island” of price. This pattern is often accompanied by a surge in volume, indicating a fundamental shift in market sentiment. Island reversal FVGs are high-confidence trend reversal indicators; once confirmed, it’s prudent to establish positions in the new trend direction.

Market Participant Divergence — Professional FVG vs. Novice FVG

Not all gaps carry the same significance; the information conveyed by FVGs dominated by different participants varies greatly.

Professional FVG typically features: the gap direction aligns with the established trend, volume significantly increases during formation, the gap is not quickly filled afterward, and it often acts as a new support or resistance level. These gaps are usually driven by institutional traders or “smart money,” aiming to follow the big trend, making them more durable. The key to identifying professional FVG is volume—substantial volume increase is a hallmark of institutional participation.

Novice FVG is quite different. These gaps often appear at the start of a new trend or after a period of consolidation, with relatively low volume, indicating a lack of strong consensus. The danger is that novice FVGs can be quickly filled, leading to rapid reversals. Recognizing these involves noting if the gap appears early in a trend, volume is low, and prices subsequently stagnate or reverse. The wise approach is to wait for further confirmation before acting.

The appearance of these two types of FVG reflects the true market forces at play. Learning to distinguish them helps you avoid following retail herd behavior and instead follow genuine market momentum.

Consolidation Phase Opportunities — The Trading Logic of Common FVG

Not all market behavior occurs in a strong trend; consolidation periods also feature FVGs.

Common FVG (or zone FVG) mainly appears during trading ranges or sideways markets. They are characterized by small size, low volume, and quick filling. These gaps often reflect market hesitation before deciding on a direction, with low participation. The identification method is straightforward: look for small gaps on sideways charts, which are usually filled within a few trading days.

Common FVGs have limited trading value; most professional traders tend to ignore them. However, for short-term traders, the process of filling these gaps can sometimes offer small arbitrage opportunities. The key is not to treat small gaps during consolidation as major signals, as they can lead to false breakouts.

Bullish and Bearish FVG — Basic Signal Recognition and Application

The simplest classification of FVGs is by direction: bullish and bearish.

Bullish FVG forms when the opening price is significantly higher than the previous close, leaving an upward gap. This usually indicates strong buying pressure and market anticipation of an upward move. The key identification points are: the opening price exceeds the previous day’s high, volume increases, and in an uptrend, a bullish FVG suggests continuation; in a downtrend, it may signal a reversal. Once confirmed (the gap is followed by further upward movement), establishing long positions is often advantageous. The gap zone typically acts as a new support level.

Bearish FVG is the opposite, forming when the opening price is significantly lower than the previous close. This reflects a sudden surge in selling pressure. Identification involves: the opening price below the previous day’s low, volume increases, and prices continue downward. Bearish FVGs can also serve as resistance levels, and even if prices bounce, they may encounter resistance at the gap.

These two basic FVG types form the foundation for all more complex patterns.

Practical Trading Tips for FVG

Once you understand the various types of FVG, the following practical tips can enhance your application:

Confirmation First. Never act solely based on the presence of a gap. Observe the subsequent price action to ensure its direction aligns with your expectations.

Volume Is the Validator. An increase in volume is a crucial confirmation signal for FVG reliability. Gaps formed with low volume are less trustworthy.

Prioritize Risk Management. Even high-probability FVGs can fail. Set reasonable stop-loss levels to prevent losses from unexpected moves.

Use Multiple Timeframes. Combining FVG signals on hourly charts with trend analysis on daily charts often yields higher confidence.

Deeply understanding the essence and various forms of FVG is a necessary step for beginners to become competitive traders. Through continuous observation and practice, you will gradually develop a keen sense for market FVG signals.