Fair Value Gaps
Story— Rahit watched the Nifty futures screen as the gap formed during the morning panic. His algorithm detected the FVG forming between 17,850 and 17,920. This wasn't just any gap - it was the type that institutions would systematically fill before lunch. As the price retreated into the zone, his orders executed precisely at the predetermined levels, harvesting the inefficiency that most retail traders failed to recognize.
In the shadow realm of Dalal Street, FVGs are the invisible bridges where retail traders unknowingly fund institutional retracements. The algo hunters track these gaps like bloodhounds, knowing each FVG represents a predetermined liquidity zone where the smart money will eventually return to claim its due.
Mind Note
“FVGs are temporary pricing inefficiencies that market participants systematically exploit.”
Lesson Content
Fair Value Gaps (FVGs) are significant price inefficiencies that occur when there's a substantial difference between consecutive candlesticks, creating a gap where fair value hasn't been properly established. In Indian markets, FVGs often emerge during high-volatility sessions or around corporate announcements. For instance, during the 2020 COVID crash, many stocks exhibited FVGs as prices gapped down but failed to find immediate fair value. The FVG represents the area where institutional orders were likely executed at suboptimal prices, creating an imbalance that smart money often seeks to fill. In Nifty futures, FVGs frequently appear during F&O expiry week when algorithmic trading accelerates. The upper FVG boundary is formed by the low of the first candle, while the lower boundary is set by the high of the subsequent candle. These zones become magnet-like areas as market makers and algorithms work to establish fair pricing, creating high-probability reversal or continuation zones depending on market context.
Key Takeaways
- 1.FVGs represent areas where fair pricing hasn't been established
- 2.These zones act as magnets for institutional order flow
- 3.Understanding FVGs provides insight into market maker behavior
Trader Tips
- 💡Use FVGs in conjunction with volume profile for higher probability setups
- 💡FVGs in penny stocks often have lower fill rates due to wider spreads
- 💡Time your entries when price revisits FVG zones with confluence support/resistance
Important Notes
- ⚠️FVGs work best in liquid instruments with tight spreads
- ⚠️Not all gaps are FVGs - look for significant price inefficiencies between consecutive candles
Cheatsheet
- ✓Identify FVGs when candle bodies don't overlap significantly
- ✓Upper FVG: Low of first candle to low of second candle
- ✓Lower FVG: High of first candle to high of second candle
- ✓FVGs are filled 70-80% of the time in liquid stocks like Reliance or HDFC Bank
- ✓FVGs in Bank Nifty often signal larger institutional activity
TL;DR
- •FVGs are price inefficiencies where fair value hasn't been established
- •Upper boundary is the low of the first candle, lower boundary is the high of the second
- •Common in Indian markets during volatility, F&O expiry, and corporate events
- •Act as magnets for institutional orders as fair value is re-established
Connected Lessons
Quiz Preview
In the context of Fair Value Gaps in Indian markets, which statement is correct?
- It requires understanding of SEBI regulations and market practices
- It is only relevant for foreign investors
- It does not require any specific knowledge
- It is illegal in India
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