The Potential Of The Fair Value Gap

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Understanding the Fair Value Gap

The Fair Value Gap is a price action indicator that analyzes the relationship between three candlesticks to identify gaps or price differences. It focuses on the gap between the current candlestick and the two preceding candlesticks. By observing specific patterns, traders can determine the momentum of the market.

1. Upward Momentum: If the high price of the two previous candlesticks is lower than the low of the current candlestick, it indicates upward momentum in the market.
2. Downward Momentum: When the high price of the two previous candlesticks is higher than the high of the current candlestick, it suggests a decline in momentum.

The concept of “window filling” suggests that there is a tendency for the gap to be filled over time. However, it is important to note that the Fair Value Gap primarily serves as a trend-following tool.

Introducing the Fair Value Gap (FVG) Indicator

To simplify the identification of the Fair Value Gap on a candlestick chart, the SMC Forex Indicators offer the Fair Value Gap (FVG) indicator. This specialized tool highlights the precise location of the FVG, making it easier for traders to analyze market movements.

ATR Filtering for Support and Resistance

Recognizing that numerous FVGs may appear across different time frames, the SMC Forex Indicators introduce Average True Range (ATR) as a filtering mechanism to determine the significance of each gap. Only gaps exceeding the calculated ATR value are displayed, providing traders with a clearer view of the market dynamics.

Additionally, the FVG is transformed into a stretched band or square, representing potential support and resistance levels. These levels act as delicate price ranges, and traders can consider them as points of interest when analyzing market behavior.

FX Keystone Original Support and Resistance

To further enhance the utility of the SMC Forex Indicators, the FX Keystone Original Support, and Resistance lines are derived from recent candlestick conditions where the FVG occurred. These lines are drawn based on the lows and highs observed during the FVG, indicating potential areas of support and resistance.

When a resistance line forms, it signifies a falling FVG and downward momentum, while a support line indicates a rising FVG and upward momentum. Breaking these lines at the closing price may lead to even stronger momentum shifts, presenting potential trading opportunities.

Conclusion

The SMC Forex Indicators harness the power of the Fair Value Gap concept by providing traders with specialized tools for identifying gaps and analyzing market momentum. By incorporating ATR filtering and original support and resistance lines, these indicators aim to enhance trading analysis and decision-making. However, as with any trading tool, it is essential to exercise caution and conduct thorough analysis before executing trades. The SMC Forex Indicators serve as a valuable resource, and traders are encouraged to experiment and adapt them to their trading strategies while keeping a keen eye on market conditions.