Fair Value Gap (FVG) Explained: How to Find and Trade It

What is a fair value gap (FVG)?

A fair value gap is a three-candle pattern in which the wick of the first candle and the wick of the third candle do not overlap, leaving an empty space across the large middle candle. It marks a stretch of prices where the market moved fast in one direction. Many traders expect price to revisit that space later.

The term comes from smart money concepts. It is also called an imbalance. A candle’s body is the thick part between its open and close, and its wicks are the thin lines showing the highest and lowest prices reached.

Bullish vs bearish fair value gap: the exact rules

Number three candles in a row as 1, 2 and 3. Candle 2 is the big one in the middle.

• Bullish FVG. The low of candle 3 is above the high of candle 1. It forms during a sharp rise.
• Bearish FVG. The high of candle 3 is below the low of candle 1. It forms during a sharp fall.

In both cases the gap is the space between those two prices. Use the wicks, not the bodies. If the wicks of candles 1 and 3 overlap by even a fraction of a pip, there is no gap. (A pip is the smallest standard price step, 0.0001 on most pairs.) Here is an example with made-up prices on EUR/USD. Candle 1 has a high of 1.1010. Candle 2 is a large rising candle. Candle 3 has a low of 1.1022. That leaves a bullish FVG from 1.1010 to 1.1022, 12 pips tall.

To find one on your own chart, look for an unusually large candle, then check the candles on either side of it. If you can slide a horizontal line through the big candle’s body without touching either neighbour’s wick, you have found a gap. The pattern is only complete when candle 3 closes.

Why do traders expect price to return to an imbalance?

In normal trading, candles overlap, so most prices are traded in both directions. Inside a fair value gap that did not happen. Only candle 2 crossed those prices, and it crossed them one way. Buying so outweighed selling, or the reverse, that there was little two-way trade. That is the imbalance.

The reasoning traders give is that the market tends to come back and trade through such areas again, to “rebalance” them. A plainer version: after a sudden surge, price often pulls back part of the way, and the gap is where that pullback may meet buyers who missed the move. Both are explanations after the fact.

How to mark a fair value gap and its 50% level

• Draw the box. For a bullish FVG, draw a rectangle from the high of candle 1 up to the low of candle 3. For a bearish FVG, draw it from the low of candle 1 down to the high of candle 3. Extend it to the right.
• Mark the midpoint. Add the two edges and divide by two. In the example, (1.1010 + 1.1022) ÷ 2 = 1.1016. This 50% level is often called consequent encroachment. Some traders use it as their entry price. Others treat a candle close beyond it as a sign the gap is weakening.

Ignore very small gaps: a 1-pip gap on a 5-minute chart is inside the spread. Compare each gap with the ATR indicator, which measures the average candle size, and skip the tiny ones.

How to trade fair value gaps

• Bias. Decide the direction from the daily or 4-hour chart, using multi-timeframe analysis. Only take bullish gaps in an uptrend and bearish gaps in a downtrend.
• Entry. Wait for price to come back into the gap. Enter with a limit order, an order that waits at a set price, at the near edge or the midpoint. Or wait for a candle to reject the gap and close back out of it.
• Stop. Place the stop-loss, the order that closes a losing trade, beyond the far edge of the gap or, more safely, beyond the swing low or high (the turning point) that started the move.
• Target. Aim for the next swing high in an uptrend, or the next swing low in a downtrend.

Continue the example. The daily trend is up. The rally that left the gap began at a swing low of 1.0995 and peaked at 1.1070. You place a buy limit at the midpoint, 1.1016, with a stop at 1.0990, 5 pips below the swing low. The risk is 26 pips. The target is the swing high at 1.1070, a reward of 54 pips, or about twice the risk.

On a $1,000 account risking 1%, or $10, with EUR/USD worth about $10 per pip on a standard lot (100,000 units), the size is 10 ÷ (26 × 10) = 0.038 lots, rounded down to 0.03. The position size calculator does this for any pair. On low timeframes the stops are tight, so the spread, the gap between buy and sell prices, becomes a big share of the risk: a 1.5-pip spread is 10% of a 15-pip stop. That makes costs worth checking when you compare regulated brokers.

What makes a fair value gap more meaningful?

• It was created by displacement. Displacement means a sudden, forceful move made of large candles. A gap it leaves matters more than one left by a single odd candle in a quiet market.
• The move broke structure. If the surge also closed beyond a previous swing high or low, it changed the trend picture. Break of structure is explained in price action trading.
• It is on a higher timeframe. More traders watch a daily gap than a 1-minute gap.
• It agrees with the trend. Gaps against the higher-timeframe trend tend to be run through more easily.
• It is untouched. The first return is the one most traders act on. Once price has traded right through a gap, most delete it.

What is an inverse fair value gap?

An inverse fair value gap is a gap that fails and then swaps roles. Suppose you expect the bullish FVG between 1.1010 and 1.1022 to act as a floor, but a candle closes clearly below 1.1010. The gap has failed. If price later rallies back into the same box, traders watch it as a ceiling and look for sell trades there.

It is the same role reversal as old support turning into resistance.

FVG vs weekend gap vs supply and demand zone

• Fair value gap. There is no hole in the price record, because candle 2 traded through every price. The “gap” is between the wicks of candles 1 and 3.
• Weekend gap. This is a true hole on the chart. The forex market closes for the weekend and reopens at a different price because news arrived while it was shut.
• Supply or demand zone. A zone is drawn around the small pause candles before a strong move. An FVG is drawn inside the strong move itself. See supply and demand zones for that method.

Do fair value gaps always get filled?

No. The honest limits are these:

• Gaps appear constantly. On a low timeframe you can find dozens in a day.
• Many never fill, or fill and keep going. In a strong trend price can leave a gap behind and not return for weeks. Other times it enters the gap, triggers your order and runs straight through the stop.
• “It filled” is a loose claim. Given enough time, price revisits most levels, which does not help a trade planned for this afternoon.
• The institutional story is unverified. Spot forex has no central order book. No retail trader can see whether large orders caused a gap or are waiting inside it.

So treat FVG trading like any other pattern. Write exact rules for gap size, timeframe, trend, entry, stop and target. Then test them over a large sample, counting every gap that met the rules, not only the pretty ones. The guide to backtesting and keeping a trading journal explains how.

A fair value gap shows where price moved quickly in the past. It cannot tell you whether price will come back, or what it will do when it gets there. Forex and CFDs carry a high risk of loss. Only risk money you can afford to lose.