Fair Value Gap (FVG) Explained

What is a fair value gap?

A fair value gap (FVG), also called an imbalance, is a three-candle pattern where price moved so quickly that it left an inefficiency on the chart. Specifically, the wick of the first candle and the wick of the third candle do not overlap, leaving a gap around the large middle candle. This gap represents an area where buying and selling were not balanced.

Markets tend to return to these inefficiencies to rebalance, which is why traders watch fair value gaps as magnet zones and potential entry areas.

How to identify a fair value gap

To find a bullish FVG, look for three candles where:

• Candle 2 is a large, impulsive up candle.
• The high of candle 1 sits below the low of candle 3.
• The empty space between them is the fair value gap.

How to trade a fair value gap

FVGs are often combined with order blocks. A common setup is an order block that also contains a fair value gap - when price returns and fills the gap, traders look for a reaction and a confirmation entry. The gap can be used as the entry zone and the structural swing as the invalidation.

Not all gaps fill, and not all fills reverse. The strongest FVGs align with the higher-timeframe trend and sit inside a discount (for longs) or premium (for shorts) area of the range.