Fair Value Gaps

A fair value gap (FVG) is a price area created by a strong, one sided move where buying or selling was so aggressive that the market skipped over prices without trading much there. In smart money concepts, an FVG is identified using three consecutive candles: the gap between the first candle's wick and the third candle's wick, which the large middle candle jumped across. Traders expect price to often return to fill or partially fill these imbalances.

How to identify an FVG#

The middle candle is usually a large displacement candle. See Displacement.

Why price revisits FVGs#

The idea is that the fast move left the area with little two sided trading, so the "fair" price was not properly established there. Later, price often returns to trade through the area, sometimes called "rebalancing". In more conventional terms, FVGs resemble small gaps and low volume areas, which price often revisits. See Price Gaps and How to Trade Them and High and Low Volume Nodes.

How traders use FVGs#

1. Entries on pullbacks: after a break of structure with an FVG, buy the pullback into the gap (bullish) or sell the rally into it (bearish).
2. Partial fills: many traders consider the midpoint of the gap, sometimes called the consequent encroachment, as a key level.
3. Targets: unfilled FVGs in the opposite direction can act as magnets and targets.
4. Confirmation of intent: an FVG left by a break of structure shows the move had force behind it.

Valid vs weak FVGs#

Stronger FVGs tend to:

• Form during a break of structure, not in the middle of a range.
• Align with the higher timeframe trend.
• Sit near other levels, such as order blocks or broken resistance. See Order Blocks.
• Be fresh, not already filled.

Weak FVGs form everywhere on low timeframes. Many small gaps appear in normal trading and mean little.

Inversion FVGs#

When price trades fully through an FVG and closes beyond it, some traders treat the gap as an "inversion FVG" that now acts in the opposite role, similar to role reversal. See Role Reversal and Retests.

A realistic view#

Fair value gaps are popular because they offer precise entry zones and tight stops. But they are extremely common, especially on lower timeframes, and many are filled without producing a reaction, or never revisited at all. Using them with trend, structure and location filters, and testing those rules over many trades, is what separates useful practice from chart decoration.

Common mistakes#

• Trading every FVG on every timeframe.
• Ignoring trend context.
• Placing stops inside the gap, where normal rebalancing hits them.

Frequently asked questions#

What is a fair value gap?#

A three candle price imbalance where the first and third candles' wicks do not overlap, leaving a gap created by a strong middle candle.

Do fair value gaps always get filled?#

No. Many are revisited and partially or fully filled, but some remain open, especially during strong trends.

What timeframe is best for fair value gaps?#

FVGs on higher timeframes are generally more significant. Many traders identify them on the 1 hour or 4 hour chart and refine entries on lower timeframes.

Next, learn the strong moves that create these gaps: Displacement.