Inversion Fair Value Gap

In Forex trading, understanding advanced concepts like the Inversion Fair Value Gap (FVG) can significantly improve your trading performance. This concept, closely tied to liquidity purges and market structure shifts, provides traders with precise entry points by identifying price gaps that can act as future support or resistance levels. Whether you are new to FOREX trading for beginners or an experienced member of the Elite inner traders group, mastering the use of inversion fair value gaps can be a game-changer in your trading strategy. In this article, we'll explore what inversion fair value gaps are, how to identify them, and how they can be effectively used in your Forex trading to enhance profitability.

What is an Inversion Fair Value Gap?

An Inversion Fair Value Gap (FVG) occurs when the market price moves so quickly that it skips certain price levels, creating a gap on the chart. Typically, prices move in a step-like manner, where one candle opens where the previous one closed. However, during rapid price movements, the next candle might open significantly higher or lower, leaving a gap. This gap represents an imbalance in the market where supply and demand were not fully matched.

An inversion fair value gap specifically refers to a fair value gap that has been revisited by the market. When the price retraces back to fill this gap, it can often act as a support or resistance level, creating an opportunity for traders to enter the market.

Identifying an Inversion Fair Value Gap

To effectively use Inversion Fair Value Gaps in your trading strategy, you must first be able to identify them accurately. Here's a step-by-step guide to spotting these gaps:

1. Identify a Liquidity Purge: The first step is to look for a liquidity purge, which is a rapid movement in price that takes out a liquidity zone, such as a swing high or low. This is a common precursor to the formation of a fair value gap. This can be seen clearly on the 15-minute timeframe chart, which provides a balanced view of intraday market movements.

2. Look for a Market Structure Shift: After identifying a liquidity purge, the next step is to wait for a Market Structure Shift. This shift indicates a change in the market's direction. For example, if the market was trending upward and then shifts to a downward trend, this change is often marked by a significant price displacement. It is essential to observe how the price closes after the displacement. If it closes above a previous high or below a previous low, it signals a market structure shift.

3. Locate Fair Value Gaps: After a market structure shift has been confirmed, move to a lower timeframe, such as the 1-minute chart, to find fair value gaps. These gaps are the areas left by rapid price movements that did not allow for a balanced trade between buyers and sellers. The gaps appear as voids or spaces between two price levels where the market has moved too fast.

4. Wait for Inversion of the Fair Value Gap: A fair value gap becomes an Inversion Fair Value Gap when the market retraces to fill this gap. For example, if a bullish fair value gap forms and the price retraces back to fill the gap, this zone can act as a strong support level. Conversely, if a bearish gap forms and is later filled by a retracing price, it can act as a resistance level.

Applying Inversion Fair Value Gaps in Trading

Once you've identified an Inversion Fair Value Gap, the next step is to use this knowledge to enter a trade. Here's how you can apply this strategy:

1. Enter the Market After the Gap is Filled: Once an inversion fair value gap has been identified, you should wait for the price to retrace back to this gap. The gap's boundaries serve as strong support or resistance, providing a safer entry point. For example, if you spot an inversion fair value gap below the current price level, wait for the price to dip back to this level before entering a long (buy) position.

2. Confirm with Market Structure Shift. Use the presence of a market structure shift as additional confirmation before entering a trade based on an inversion fair value gap. For instance, if the market structure shift suggests a bullish trend and an inversion fair value gap forms at a lower price, this alignment can increase the probability of a successful trade.

3. Monitor the Trade: After entering a trade, it’s crucial to keep monitoring the market to ensure that the trade continues to align with the overall market direction. If the price moves against your position significantly, consider exiting to minimize losses.

Example of Using Inversion Fair Value Gaps

To illustrate, let’s look at a hypothetical example:

• Scenario: You observe a 15-minute chart and notice a Liquidity Purge that takes out a previous swing high, followed by a market structure shift indicating a potential move upward.
• Next Step: You then switch to a 1-minute chart and notice a bullish fair value gap has formed.
• Action: The price retraces back to the fair value gap level and starts to consolidate.
• Decision: Once the price begins to move away from the inversion fair value gap, showing signs of support, you enter a long position. You place your stop-loss below the fair value gap to protect against a potential downturn.

Benefits of Trading with Inversion Fair Value Gaps

Trading using inversion fair value gaps has several advantages:

1. Precise Entry Points: By using inversion fair value gaps, traders can pinpoint more precise entry points, improving the risk-to-reward ratio of trades.

2. Reduced Risk: These gaps act as clear support and resistance zones, allowing traders to place stop-loss orders at logical points that limit risk.

3. Improved Market Understanding: Recognizing fair value gaps and their inversion helps traders better understand market dynamics, including where significant buying and selling pressure exists.

4. Consistency in Strategy: Utilizing a consistent approach, such as trading around inversion fair value gaps, can help create a disciplined trading strategy that improves long-term success rates.

Conclusion: Mastering Inversion Fair Value Gaps

Understanding and applying the concept of Inversion Fair Value Gaps is an essential skill for any Forex trader looking to refine their strategy and increase profitability. By accurately identifying these gaps and understanding their role in the market structure, traders can make more informed decisions and enter trades with higher confidence.

If you're looking to further deepen your knowledge of Forex trading strategies, consider reading the "Elites Trading Bible." This comprehensive book covers a wide range of trading concepts, including liquidity purges, market structure shifts, and inversion fair value gaps, providing valuable insights for both novice and experienced traders.

By accurately identifying fair value gaps and understanding their role in the market structure, traders can make more informed decisions and enter trades with higher confidence.