What Is an Inverse Fair Value Gap (IFVG) Concept in Trading?
Inverse Fair Value Gaps (IFVGs) are a fascinating concept for traders seeking to refine their understanding of price behaviour. By identifying areas where market sentiment shifts, IFVGs provide unique insights into potential reversals and key price levels. In this article, well explore what IFVGs are, how they differ from Fair Value Gaps, and how traders can integrate them into their strategies for more comprehensive market analysis.
What Is a Fair Value Gap (FVG)?
A Fair Value Gap (FVG) occurs when the market moves so rapidly in one direction that it leaves an imbalance in price action. This imbalance shows up on a chart as a gap between three consecutive candles: the wick of the first candle and the wick of the third candle fail to overlap, leaving a gap created by the second candle. It essentially highlights an area where buying or selling pressure was so dominant that the market didnt trade efficiently.
Traders view these gaps as areas of potential interest because markets often revisit these levels to "fill" the imbalance. For example, in a bullish FVG, the gap reflects aggressive buying that outpaced selling, potentially creating a future support zone. On the other hand, bearish FVGs indicate overwhelming selling pressure, which might act as resistance later.
FVGs are closely tied to the concept of fair value. The gap suggests the market may have deviated from a balanced state, making it an area traders watch for signs of price rebalancing. Recognising and understanding these gaps can provide insights into where the price might gravitate in the future, helping traders assess key zones of interest for analysis.
Understanding Inverse Fair Value Gaps (IFVGs)
An Inverse Fair Value Gap (IFVG), or Inversion Fair Value Gap, is an Inner Circle Trader (ICT) concept that builds on the idea of an FVG. While an FVG represents a price imbalance caused by strong directional movement, an IFVG emerges when an existing FVG is invalidated. This invalidation shifts the role of the gap, turning a bearish FVG into a bullish IFVG, or vice versa.
Heres how it works: a bearish FVG, for instance, forms when selling pressure dominates, leaving a gap that might act as resistance. However, if the market breaks through this gapeither with a wick or a candle closeit signals that the sellers in that zone have been overwhelmed. The bearish FVG is now invalidated and becomes a bullish IFVG, marking a potential area of support instead. The same applies in reverse for bullish FVGs becoming bearish IFVGs.
Traders use inverted Fair Value Gaps to identify zones where market sentiment has shifted significantly. For example, when the price revisits a bullish IFVG, it may serve as a zone of interest for traders analysing potential buying opportunities. However, if the price moves past the bottom of the IFVG zone, its no longer valid and is typically disregarded.
What makes these reverse FVGs particularly useful is their ability to highlight moments of structural change in the market. They can act as indicators of strength, revealing areas where price has transitioned from weakness to strength (or vice versa). By integrating IFVG analysis into their broader trading framework, traders can gain deeper insights into the evolving dynamics of supply and demand.
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How Traders Use IFVGs in Trading
By integrating IFVGs into their strategy, traders can refine their decision-making process and uncover potential setups aligned with their broader market outlook. Heres how IFVGs are commonly used:
Identifying Key Zones of Interest
Traders begin by spotting FVGs on price chartsareas where rapid movements create imbalances. An inversion FVG forms when such a gap is invalidated; for instance, a bearish FVG becomes bullish if the price breaks above it. These zones are then marked as potential areas of interest, indicating where the market may experience significant activity.
Contextualising Market Sentiment
The formation of an IFVG signals a shift in market sentiment. When a bearish FVG is invalidated and turns into a bullish IFVG, it suggests that selling pressure has diminished and buying interest is gaining momentum. Traders interpret this as a potential reversal point, providing context for the current market dynamics.
Analysing Price Reactions
Once an IFVG is identified, traders monitor how the price interacts with this zone. If the price revisits a bullish IFVG and shows signs of supportsuch as slowing down its decline or forming bullish candlestick patternsit may indicate a strengthening upward movement. Conversely, if the price breaches the IFVG without hesitation, the anticipated reversal might not materialise.
How Can You Trade IFVGs?
IFVGs provide traders with a structured way to identify and analyse price levels where sentiment has shifted. The process typically looks like this:
1. Establishing Market Bias
Traders typically start by analysing the broader market direction. This often involves looking at higher timeframes, such as the daily or 4-hour charts, to identify trends or reversals. Tools like Breaks of Structure (BOS) or Changes of Character (CHoCH) within the ICT framework help clarify whether the market is leaning bullish or bearish.
Indicators, such as moving averages or momentum oscillators, can also provide additional context for confirming directional bias. A strong bias ensures the trader is aligning setups with the dominant market flow.
2. Identifying and Using IFVGs
Once a Fair Value Gap (FVG) is invalidatedindicating a significant shift in sentimentit transforms into an Inverse Fair Value Gap (IFVG). Traders mark the IFVG zone as a key area of interest. If it aligns with their broader market bias, this zone can serve as a potential entry point. For instance, in a bearish bias, traders may focus on bearish IFVGs that act as potential resistance zones.
3. Placing Orders and Risk Management
Traders often set a limit order at the IFVG boundary, anticipating a retracement and for the area to hold. A stop loss is typically placed just beyond the IFVG or a nearby swing high/low to manage risk. For exits, targets might include a predefined risk/reward ratio, such as 1:3, or a significant technical level like an order block or support/resistance area. This approach ensures trades remain structured and grounded in analysis.
Advantages and Disadvantages of IFVGs
IFVGs offer traders a unique lens through which to analyse price movements, but like any tool, they come with both strengths and limitations. Understanding these can help traders incorporate IFVGs into their strategies.
Advantages
- Highlight market sentiment shifts: IFVGs pinpoint areas where sentiment has reversed, helping traders identify key turning points.
- Refined entry zones: They provide precise areas for potential analysis, reducing guesswork and offering clear levels to watch.
- Flexibility across markets: IFVGs can be applied to any market, including forex, commodities, or indices, making them versatile.
- Complementary to other tools: They pair well with other ICT tools like BOS, CHoCH, and order blocks for enhanced analysis.
Disadvantages
- Subject to interpretation: Identifying and confirming IFVGs can vary between traders, leading to inconsistencies.
- Limited standalone reliability: IFVGs need to be used alongside broader market analysis; relying solely on them increases risk.
- Higher timeframe dependence: Their effectiveness can diminish on lower timeframes, where noise often obscures true sentiment shifts.
- Potential for invalidation: While IFVGs signal potential opportunities, they arent guarantees; price can break through, rendering them ineffective.
The Bottom Line
Inverse Fair Value Gaps provide traders with a structured approach to identifying market shifts and analysing key price levels. By integrating IFVGs into a broader strategy, traders can uncover valuable insights and potentially refine their decision-making. Ready to apply IFVG trading in real markets? Open an FXOpen account today and explore potential trading opportunities across more than 700 markets, alongside four advanced trading platforms and competitive conditions.
FAQ
What Is an Inverse Fair Value Gap (IFVG)?
The IFVG meaning refers to a formation that occurs when a Fair Value Gap (FVG) is invalidated. For example, a bearish FVG becomes bullish after the price breaks above it, creating a potential support zone. Similarly, a bullish FVG can transform into a bearish IFVG if the price breaks below it, creating a potential resistance zone. IFVGs highlight shifts in market sentiment, providing traders with areas of interest for analysing possible reversals or continuation zones.
What Is the Difference Between a Fair Value Gap and an Inverse Fair Value Gap?
A Fair Value Gap (FVG) is an imbalance caused by aggressive buying or selling, creating a price gap that may act as support or resistance. An Inverse Fair Value Gap (IFVG) occurs when the original FVG is invalidatedindicating a shift in sentimentand its role flips. For instance, a bearish FVG invalidated by a price breakout becomes a bullish IFVG.
What Is the Difference Between BPR and Inverse FVG?
A Balanced Price Range (BPR) represents the overlap of two opposing Fair Value Gaps (FVGs), creating a sensitive zone for potential price reactions. In contrast, an Inverse Fair Value Gap (IFVG) is a concept based on a single FVG that has been invalidated, flipping its role. While both are useful, BPR reflects the equilibrium between buyers and sellers, whereas IFVG highlights sentiment reversal.
Read more: https://fxopen.com/blog/en/what-is-an-inverse-fair-value-gap-ifvg-concept-in-trading/
Text source: Forex Trading Blog
