In trading, a fair value gap (FVG) is identified by a three-candle price pattern used in technical analysis: the first and third candles have wicks that do not overlap, defining a range traded through in one direction only. This gap develops when rapid, forceful buying or selling produces an imbalance. Traders look for a subsequent return to the FVG ahead of a continuation of the trend.
There are 2 principal entry methods for a fair value gap trade: 1) taking a position as price re-enters the FVG, and 2) waiting for a confirmation candle within the FVG before opening a position. A stop-loss is placed beyond the FVG, with the next swing high or swing low serving as the price target.
A Fair Value Gap (FVG) Marks a Trading Imbalance
FVG stands for fair value gap in trading. This price action candlestick pattern highlights a range that lacked two-way trading between buyers and sellers. Its structure consists of 3 successive candles: 1) candle 1 provides the high or low used to measure the gap, 2) candle 2 is a large, fast-moving candle known as the displacement candle, and 3) candle 3 has a wick that does not overlap that of candle 1.
With the displacement candle extending across it, the range separating the wicks of candle 1 and candle 3 defines the fair value gap. The alternative term price inefficiency describes the same feature: price moved through this range too rapidly for normal trading in both directions.
The term FVG derives from fair value: the range in which buyers and sellers agreed on value during sideways trading before the displacement candle appeared. A rapid departure by the displacement candle establishes a new fair value. The intervening range that it passed over becomes the gap.
Popularised by the Inner Circle Trader (ICT), the fair value gap forms a central element of smart money concepts (SMC). Under this approach, an FVG represents the mark left by institutional traders executing large orders. An FVG is used as a support or resistance level. As it requires just 3 candles, it develops more rapidly than a conventional support or resistance level.
Fair Value Gaps and Price Gaps Reflect Different Trading Activity
With a price gap, otherwise known as a normal gap, price jumps from one candle to another without any trading between them. In a fair value gap, however, the displacement candle has already traded through the range once. The distinction also affects the candle count: a price gap requires 2 candles, compared with 3 for a fair value gap.
Markets with closing periods are where price gaps occur most often. For example, overnight or weekend news can cause a stock to open considerably above or below its previous price. By contrast, fair value gaps arise within trading hours across every market, including 24/7 markets such as Bitcoin, in which price gaps are uncommon.
Both belong to the broader group known to traders as liquidity voids: areas crossed rapidly by price with little resistance.
| Feature | Fair value gap | Price gap | Liquidity void |
|---|---|---|---|
| Candle count | 3 | 2 | Any number of candles |
| Formation mechanism | A displacement candle moves rapidly while the market is trading | Trading is absent between 2 candles, typically during a market closure | Price moves rapidly against little resistance |
| Common occurrence | Across all markets, including 24/7 crypto markets | At the opening of stock markets, notably after weekends | Encompasses fair value gaps as well as price gaps |
Aggressive Orders Create the Fair Value Gap Before a Return
There are 2 stages to the process: 1) aggressive orders produce an FVG, followed by 2) a later return by price to trade through the range passed over by the displacement candle.
Unequal Buying and Selling Aggression Creates Fair Value Gaps
When one side becomes substantially more aggressive than the other, a fair value gap develops. Buyers overwhelming sellers drive the displacement candle sharply higher, leaving a bullish FVG; sellers overwhelming buyers produce a displacement candle that leaves a bearish FVG.
Since every transaction needs both a buyer and a seller, an imbalance does not mean that buy orders exceed sell orders in number. Instead, one side has driven price across a range so rapidly that resting orders at many levels had no opportunity to be executed.
Such moves are usually triggered by news, including economic data releases or earnings reports. They can also follow a breakout from sideways trading when volatility is high.
Despite the common description of an FVG as an untraded range, its prices were all traded by the displacement candle. The distinction is that it crossed the range just once, moving in only one direction. Few orders were consequently matched there, leaving a thinly traded range visible on the chart.
Unmatched Orders Often Bring Price Back to a Fair Value Gap
Resting orders left unmatched during the rapid move often explain a subsequent return to the FVG. With large orders still awaiting execution, institutional traders want price to revisit those levels. The gap therefore exerts a magnet-like pull on price.
This return is termed a retest. When aligned with the prevailing trend, a retest is treated as a trading signal. It does not, on its own, indicate a reversal; traders first assess the response within the FVG before taking a position.
There is no certainty of a return. A strong trend can carry price further away from the FVG without a retest ever taking place.
Four Chart Checks Identify a Fair Value Gap
The chart identification process comprises 4 steps:
- Start with the displacement candle. Its body should be large relative to the neighbouring candles on either side.
- Check the separation between the wicks of candles 1 and 3. Candle 1's high must lie below candle 3's low for a bullish FVG. A bearish FVG requires candle 1's low to lie above candle 3's high.
- Draw a rectangle around the FVG. Use the wick of candle 1 and the wick of candle 3 as its boundaries, then extend it rightwards to track any return by price. The Rectangle tool in TMGM MT4 and MT5 allows this area to be drawn on the chart.
- Plot the midpoint at 50%. Run a line through the centre of the FVG to show the level known among ICT traders as consequent encroachment. A pullback into the FVG that holds at the 50% level is regarded by many traders as evidence of a stronger gap.
Using a fair value gap indicator automates the marking of FVGs. Custom indicators can be added to TMGM MT4 and MT5, but their signals still require checks against the trend and higher timeframe before a trade. Many of the FVGs they mark represent noise.
Timeframe and Market Volume Shape Fair Value Gap Behaviour
Every timeframe can display fair value gaps, ranging from the 1-minute chart to the daily chart. Frequency and the length of time a gap holds as support or resistance depend on the timeframe used.
| Timeframe range | Chart examples | Typical FVG behaviour | Trading application |
|---|---|---|---|
| Short-term charts | 1-minute, 5-minute | Numerous FVGs, with rapid fills in most cases | Refining entry timing |
| Mid-range charts | 15-minute, 1-hour | Fewer gaps that merit marking | Choosing the gap to trade |
| Longer-term charts | 4-hour, daily | FVGs are least frequent but remain support or resistance for longer | Interpreting the trend alongside support or resistance levels |
Although applicable to forex, stocks, futures, commodities and crypto, fair value gaps tend to work best in heavily traded markets. Within forex trading, the most reliable FVGs tend to develop during hours of high trading volume.
A Close Beyond the Far Boundary Fills a Fair Value Gap
To fill a fair value gap, price must travel back across its full range and a candle must close beyond the opposite boundary. That close is below candle 1's high in a bullish FVG, or above candle 1's low in a bearish FVG. While an unfilled gap retains its potential support or resistance role, a filled gap is no longer used for new trades in its original direction.
Before preparing a trade aligned with an FVG, verify that it has not been filled. Once filled, it ceases to provide support or resistance in that direction.
Following a fill, an FVG may become an inverse fair value gap (IFVG). A candle closing below a bullish FVG often converts former support into resistance; a close above a bearish FVG often converts former resistance into support. Traders then use the next retest to trade the IFVG in its new direction.
Fair Value Gap Example & Strategy: Bullish and Bearish FVGs Become Trade Plans
An FVG trading strategy translates the gap into a plan specifying an entry, stop-loss and price target. Each of our FVG examples uses these 4 steps:
- Establish the trend first. Use a higher timeframe to assess direction, trading bullish FVGs during an uptrend and bearish FVGs during a downtrend.
- Allow price to retest the gap. Wait for a return to the FVG before taking a position.
- Choose one of 2 methods for entry. 1) Enter immediately as price re-enters the FVG, or 2) await a confirmation candle within it that holds the 50% level, such as an engulfing candle or one with a long rejection wick.
- Determine the stop-loss and target before the position size. Put the stop-loss just outside the FVG's far boundary. For the price target, use the next swing high or swing low, an opposing unfilled FVG, or the previous day's high or low.
For stop-loss placement, traders have 2 options: 1) just outside the FVG's far boundary, providing a tighter stop-loss and allowing a larger position for the same risk, or 2) beyond the displacement candle, a safer placement that accommodates a deeper retest but requires a smaller position. Calculate position size using the distance to the stop-loss so that account risk remains unchanged whichever placement is selected.
| Important: During news releases spreads widen, so a stop-loss placed just beyond the FVG can be hit by the wider spread alone or filled with slippage. |
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The following 2 examples demonstrate this FVG trading strategy using a bullish gap in EUR/USD and a bearish gap in XAU/USD. Prices throughout both fair value gap examples are illustrative.
EUR/USD Forms a Bullish FVG in an Uptrend
During an uptrend on the EUR/USD 1-hour chart, a displacement candle climbs from 1.1209 to 1.1255 and creates a bullish FVG. With candle 1's high at 1.1212 and candle 3's low at 1.1228, the gap spans 1.1212 to 1.1228. Its 50% level is 1.1220.
After six hours, price retraces into the FVG. The confirmation candle's lower wick reaches 1.1221, while the 50% level holds, and the candle closes at 1.1233.
| Trading parameters | Entry 1: during the retest | Entry 2: following confirmation |
|---|---|---|
| Position entry | Buy at 1.1228 as price makes its first contact with the FVG's upper boundary | Buy at 1.1233 when the confirmation candle closes |
| Stop-loss level | 1.1209, slightly below candle 1's high (safer placement: 1.1203, beneath the displacement candle) | 1.1209 (safer placement: 1.1203) |
| Target price | Next swing high: 1.1280 | Next swing high: 1.1280 |
| Risk-to-reward ratio | Approximately 1:2.7 (risk of 19 pips, reward of 52 pips) | Approximately 1:2 (risk of 24 pips, reward of 47 pips) |
A candle close below 1.1212 ahead of the retest would have filled this bullish FVG, cancelling the planned long trade.
XAU/USD Forms a Bearish FVG After US Data
Following a US data release, the XAU/USD 15-minute chart shows a bearish FVG within a downtrend. The displacement candle drops from 4,154.00 to 4,131.00. Candle 1 records a low of 4,152.40 and candle 3 a high of 4,144.60, defining an FVG between 4,144.60 and 4,152.40, with its 50% level at 4,148.50.
After two hours, a rally takes price back into the FVG. The confirmation candle's upper wick reaches 4,147.90, remaining below the 50% level, before the candle closes at 4,141.80.
| Trading parameters | Entry 1: during the retest | Entry 2: following confirmation |
|---|---|---|
| Position entry | Sell at 4,144.60 as price makes its first contact with the FVG's lower boundary | Sell at 4,141.80 when the confirmation candle closes |
| Stop-loss level | 4,153.20, slightly above candle 1's low (safer placement: 4,156.00, above the displacement candle) | 4,153.20 (safer placement: 4,156.00) |
| Target price | Next swing low: 4,120.00 | Next swing low: 4,120.00 |
| Risk-to-reward ratio | Approximately 1:2.9 (risk of $8.60, reward of $24.60 per ounce) | Approximately 1:1.9 (risk of $11.40, reward of $21.80 per ounce) |
A candle close above 4,152.40 ahead of the retest would have filled this bearish FVG, cancelling the planned short trade.
Four Conditions Distinguish the Strongest FVGs
The strongest fair value gaps meet 4 criteria:
- Formation follows the trend. Compared with a counter-trend gap, a bullish FVG during an uptrend or a bearish FVG during a downtrend is more likely to hold.
- Displacement produces a breakout. By breaking and closing beyond the latest swing high or swing low, the displacement candle produces what SMC traders term a break of structure (BOS). This changes the market structure, meaning the sequence of swing highs and swing lows.
- A key higher-timeframe level coincides with the FVG. Gaps aligned with support or resistance on the 4-hour or daily chart hold more frequently than those situated away from such levels.
- The gap remains unfilled ahead of its first retest. Initial retests tend to produce the strongest response. Once filled, the FVG is no longer used.
Overlap with an order block, a level at which institutional traders placed large orders, adds another reason for taking an FVG trade. A common approach is to identify the gap on a higher timeframe and use a lower timeframe for entry timing. Both the FVG and the trend then originate from the higher timeframe.
| Practical Tip: Begin by plotting FVGs on the 4-hour or daily chart. Then use the 15-minute chart to refine entry timing within that higher-timeframe gap. |
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Bullish FVGs Offer Support While Bearish FVGs Offer Resistance
For a bullish FVG to develop, price must advance sharply, leaving candle 1's high below candle 3's low. Located beneath the displacement candle, it provides potential support and acts as a magnet: price is often drawn back down to it before the uptrend resumes.
For a bearish FVG to develop, price must decline sharply, leaving candle 1's low above candle 3's high. Positioned above the displacement candle, it provides potential resistance on a rally back into the gap.
| Feature | Bullish FVG | Bearish FVG |
|---|---|---|
| Conditions for formation | A sharp advance leaves candle 1's high below candle 3's low | A sharp decline leaves candle 1's low above candle 3's high |
| Position of the gap | Beneath the displacement candle | Over the displacement candle |
| Potential function | Support | Resistance |
| Expected response to monitor | A decline into the FVG followed by renewed gains | An advance into the FVG followed by renewed losses |
FVG Strategy Results Depend on the Wider Trade Plan
When combined with the trend, a stop-loss and a price target, FVG trading can provide a good strategy. In isolation, a fair value gap merely identifies a possible reaction area; the surrounding trade plan determines the outcome.
There are 3 reasons traders favour fair value gaps: 1) entering at an FVG offers a better price than pursuing the displacement candle, 2) formation is quicker than for conventional support or resistance, and 3) the same three-candle structure applies to forex, stocks, commodities and crypto.
Against these benefits are 3 limitations: 1) price may continue in its existing direction without revisiting the FVG, 2) gaps occur on almost every chart, making many of them noise, and 3) news-driven volatility can carry price directly through a gap. Requiring only 3 candles makes an FVG quick to form, but potentially less accurate than a level established over many candles.
Four Common FVG Trading Errors Undermine Results
Most losses in fair value gap trading stem from 4 errors:
- Taking every gap as a trade. Gaps within sideways ranges and small gaps on lower timeframes tend to fill rapidly. Restrict trades to FVGs formed at a key level in line with the trend.
- Overlooking the trend on the higher timeframe. A gap opposing that trend is less likely to hold than one aligned with it.
- Calculating position size before choosing the stop-loss. First place the stop-loss beyond either the FVG or the displacement candle, then use its distance to determine position size.
- Using a gap after it has filled. A close beyond the FVG's far boundary removes its support or resistance role in the original direction. Cancel any trade plan relying on that gap.
Before putting real money at risk, use a free TMGM demo account to practise identifying and trading fair value gaps.
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Fair Value Gaps: Frequently Asked Questions
Will every fair value gap eventually fill?
Not every fair value gap fills. Although retests occur often, a strong trend can take price away from the FVG permanently. A stop-loss is therefore needed for every FVG trade.
How do fair value gaps differ from order blocks?
An order block identifies a level where institutional traders placed large orders; a fair value gap identifies a thinly traded range left by rapid price movement. The two are often combined. When an FVG overlaps an order block, the resulting trade signal is stronger than either feature used separately.
Are fair value gaps and imbalances identical?
An imbalance produces a fair value gap rather than being the gap itself. Buyers or sellers becoming considerably more aggressive than the other side is the cause; the FVG remaining on the chart is the effect. This close relationship explains why many traders use the terms interchangeably.
Can news releases produce fair value gaps?
Yes. Economic data releases, earnings reports and other news events often generate large fair value gaps by prompting rapid, aggressive buying or selling. Immediately after a release, trading involves additional risk: spreads widen, and price can travel straight through an FVG.
