What is a Fair Value Gap (FVG)?
A Fair Value Gap (FVG) is a 3-candle price pattern where the wicks of the first and third candle don't overlap — leaving an unfilled "gap" on the middle candle. It marks an imbalance created when price moved so aggressively in one direction that it skipped over a range of prices. Traders watch these gaps because price often returns to "fill" them, making FVGs popular entry zones.
How to identify an FVG
Look at any three consecutive candles. The middle candle should be a large directional move. Then check:
Forms during an up-move. The gap is the space between the high of candle 1 and the low of candle 3. If candle 1's high sits below candle 3's low, that empty space is the bullish FVG. It tends to act as support when revisited.
Forms during a down-move. The gap is the space between the low of candle 1 and the high of candle 3. If candle 1's low sits above candle 3's high, that empty space is the bearish FVG. It tends to act as resistance when revisited.
The gap exists because the middle candle moved so fast that price never traded evenly through that zone. In auction-market terms, the market left "unfair value" behind — and markets tend to return to rebalance it.
How to trade a Fair Value Gap
The standard FVG trade is a retracement entry:
- Identify the FVG in the direction of your higher-timeframe bias (only longs in a bullish trend, only shorts in a bearish trend).
- Wait for price to retrace back into the gap zone. Don't chase the initial move — the edge is in the return.
- Enter in the direction of the original move when price reacts at the FVG (often the 50% midpoint of the gap, called the "consequent encroachment" in ICT).
- Stop-loss beyond the far edge of the gap (below a bullish FVG, above a bearish FVG).
- Target the next liquidity pool, swing high/low, or opposing FVG. Aim for at least a 1:2 R-multiple.
FVGs work best with confluence — when the gap lines up with an order block, a liquidity sweep just before, or a key session level. An FVG alone is a weak signal; an FVG + order block + sweep at the same price is a high-probability setup.
Common FVG mistakes
- Assuming all gaps must fill. Many FVGs never get filled — especially in strong trends. Treat them as probability zones, not guarantees.
- Trading FVGs against the higher-timeframe trend. A bullish FVG in a strong downtrend is low-probability. Always align with HTF bias.
- Using FVGs as a standalone strategy. FVGs are one tool. Without confluence (order block, sweep, session timing), the win rate isn't there.
- Ignoring gap size. Tiny FVGs on low-volume candles are noise. The meaningful ones come from genuine momentum candles with volume.
FAQ
Is a Fair Value Gap the same as an imbalance?
Yes — in ICT/Smart Money terminology they refer to the same thing: a price area the market moved through too fast to trade evenly. "Imbalance" is the broader term; "FVG" is the specific 3-candle formation.
What timeframe works best for FVGs?
FVGs appear on all timeframes. Day traders typically use HTF (1h/4h) for bias and LTF (1-5min) for entries. The higher the timeframe an FVG forms on, the more significant it tends to be.
Does the FVG concept actually work?
FVGs describe a real market phenomenon (imbalance/inefficiency), but like any concept the edge depends on execution, confluence, and risk management. The only way to know if FVGs work for you is to journal your FVG trades and measure the expectancy. That's what GridTrade is for.
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