Fair Value Gaps vs Order Blocks

Fair Value Gaps vs Order Blocks

In ICT Trading, Fair value gaps are mostly used, meanwhile in Smart money concepts, Order Blocks are used.

ICT made a significant shift in his ICT Trading Strategy, moving from primarily using Order Blocks (OBs) to focusing on Fair Value Gaps (FVGs). Before the 2022 mentorship, ICT entered trades using order blocks, relying on their ability to identify areas where large market participants entered the market. However, in 2022, ICT shifted his approach to revolve around fair value gaps, which highlight areas of imbalance in the market caused by rapid price movements.

This transition was driven by ICT’s discovery of the distinct advantages offered by fair value gaps. FVGs demonstrate displacement, provide traders with clearer signals of where the algorithm is influencing the market.

Fair Value Gaps

In ICT Trading, a Fair Value Gap is identified by a 3-candle formation with a gap in the middle that is uninterrupted by the first or third candles. The significance of this gap lies in the fact that it demonstrates an imbalance of orders in the market, indicating that only one side of liquidity was offered in that price range. Essentially, this gap highlights a moment where either buyers or sellers dominated, leaving an imbalanced space in the price action.

In ICT Trading, FVGs are crucial for traders because they show displacement in the market, reflecting a strong push in one direction and signaling the market’s desire to move towards a further target. This displacement is indicative of the algorithm at play, as the market seeks to fill these gaps by returning to the areas of imbalance.

Order Blocks

Order blocks are powerful trading tools that, when used correctly, can be just as effective as fair value gaps. An order block is characterized by a down-close candle before an up move or an up-close candle before a down move. These candles act as true support or resistance levels, where price is likely to find stability.

The significance of order blocks lies in their ability to indicate where large market participants have entered their positions. For every buyer, there must be a seller, and large market participants require substantial liquidity to fulfill their orders. This often results in the market driving the price down to collect buy orders (or up to collect sell orders) before making a significant move in the opposite direction.

When to use Fair Value Gaps

There is no single best tool in trading; the effectiveness of Fair value gaps and Order Blocks depends on the context in which they are used. When trading liquidity sweeps or reversals, utilizing a FVG is highly advantageous.

This is because, during a liquidity sweep , manipulation occurs, and displacement follows, indicating that the algorithm is in play. FVGs show these moments of market imbalance and displacement, making them ideal for identifying potential reversal points where the market is likely to react.

Indeed, FVGs are particularly useful in ICT Trading for spotting points where the market is likely to reverse, making them a valuable tool in any trader’s arsenal

When to use Order Blocks

On the other hand, Order Blocks (OBs) are best utilized in Smart money concepts when trading continuations. When the market is already moving in a clear direction, Order Blocks act as steppingstones, providing reliable entry points that align with the prevailing trend. Recognizing the flow of the market allows traders to use Order Blocks to their advantage.

The key to using Order Blocks effectively lies in understanding their creation and context within the market’s broader movement; these candles signify areas of high liquidity where institutions have placed their positions. By analyzing the market’s overall trend and identifying these key areas, traders can better predict where the price is likely to find support or resistance.