What is Inversion Fair Value Gaps Strategy

Unraveling the Mystery: Understanding the Inversion Fair Value Gaps Strategy

In my experience as a trader in the financial industry, traders utilise a variety of technical analysis techniques and indicators to spot possible trading opportunities. The Inversion Fair Value Gaps (IFVG) strategy, which is based on the idea of Fair Value Gaps (FVGs) presented by the trading education firm, ICT, is one such technique that has gained popularity in recent years.

We’ll get into the specifics of the Inversion Fair Value Gaps technique in this post, covering its fundamental ideas, operation, and possible application by traders in their trading methodology.

Understanding Fair Value Gaps (FVGs)

It’s critical to comprehend the idea of Fair Value Gaps (FVGs) before delving into the Inversion Fair Value Gaps method. When the price of an asset opens higher or lower than the previous day’s high or low, respectively, there is a price gap known as an FVG. These differences are regarded as “fair value” since they show how the market has adjusted to fresh knowledge or occurrences that took place outside of usual business hours.

There are two categories of FVGs: bearish and bullish. When the price opens above the high of the previous day, a bullish FVG is formed, suggesting significant purchasing pressure. On the other hand, a bearish FVG happens when the price opens below the low of the previous day, indicating significant selling pressure.

The Fair Value Gaps (IFVG) Inversion Strategy

The Inversion Fair Value Gaps (IFVG) strategy is based on the idea that once an FVG has been mitigated or “inverted,” it can potentially act as a support or resistance zone. The term “mitigation” refers to the price closing above or below the FVG area in the opposite direction of its bias.

Here’s how the IFVG strategy works:

  1. Identifying FVGs: The first step is to identify Fair Value Gaps on the price chart. These gaps can be bullish (price opening above the previous day’s high) or bearish (price opening below the previous day’s low).
  2. Mitigation: Once an FVG is identified, traders watch for the price to “mitigate” or close above or below the FVG area in the opposite direction of its bias. For example, if it’s a bullish FVG, mitigation occurs when the price closes below the FVG area. Conversely, if it’s a bearish FVG, mitigation occurs when the price closes above the FVG area.
  3. Inversion: When an FVG is mitigated, it becomes an “Inverted FVG” (IFVG). Inverted Bullish FVGs are considered potential resistance zones, while Inverted Bearish FVGs are seen as potential support zones.
  4. Signals: After an FVG has been mitigated and turned into an IFVG, traders watch for the price to retest the IFVG zone. If the price breaks below an Inverted Bullish FVG (resistance) or above an Inverted Bearish FVG (support), it can generate a potential trading signal.

The IFVG strategy relies on the idea that once an FVG has been mitigated, it can act as a significant support or resistance level, as the market has already shown a reaction to that price level. Traders who employ this strategy believe that these IFVG zones can provide potential entry and exit points for trades.

Trading with the IFVG Strategy

When trading with the IFVG strategy, traders typically follow these steps:

  1. Identify FVGs: Scan the price chart for Fair Value Gaps, both bullish and bearish.
  2. Monitor mitigation: Watch for the price to close above or below the FVG area in the opposite direction of its bias, indicating mitigation.
  3. Mark IFVG zones: Once an FVG has been mitigated, mark the corresponding IFVG zone on the chart as a potential support (for Inverted Bearish FVGs) or resistance (for Inverted Bullish FVGs) level.
  4. Wait for retests: Monitor the price as it approaches the IFVG zone, looking for potential retests.
  5. Enter trades: If the price breaks below an Inverted Bullish FVG (resistance), traders may consider entering a short position. Conversely, if the price breaks above an Inverted Bearish FVG (support), traders may consider entering a long position.
  6. Set targets and stops: As with any trading strategy, it’s crucial to have a well-defined risk management plan, including setting appropriate stop-loss and take-profit levels.

It’s crucial to remember that the IFVG method is a tool that traders can use to supplement their entire trading strategy rather than a stand-alone trading system. Many traders verify any trading signals produced by the IFVG technique with additional technical indicators, price action research, and other market considerations.

Advantages and Considerations

Like any trading strategy, the IFVG approach has its advantages and considerations:

Advantages:

  1. Objective approach: The IFVG strategy is based on clearly defined rules and price patterns, making it an objective approach to identifying potential trading opportunities.
  2. Potential for high-probability trades: By focusing on price levels that have already shown market reaction (mitigation), the IFVG strategy aims to identify high-probability trade setups.
  3. Versatility: The IFVG strategy can be applied to various financial instruments, including stocks, futures, forex, and cryptocurrencies, across different time frames.

Considerations:

  1. Subjectivity in identification: While the IFVG strategy has defined rules, there can be some subjectivity in identifying and interpreting FVGs and their mitigation, especially in volatile market conditions.
  2. False signals: Like any trading strategy, the IFVG approach can generate false signals, leading to potential losses if trades are not managed properly.
  3. Importance of risk management: Proper risk management, including the use of stop-loss orders and position sizing, is crucial when trading with the IFVG strategy to protect against potential losses.

In conclusion, a technical analysis method that makes use of the idea of Fair Value Gaps and their capacity to serve as levels of support or resistance following mitigation is the Inversion Fair Value Gaps (IFVG) strategy.

When putting any trading strategy into practice, traders should always proceed with caution, carry out extensive research, and use appropriate risk management techniques—even though it provides an objective and systematic method of identifying possible trading opportunities.

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