A fair value gap (FVG) in trading is a three-candle price pattern in technical analysis where the wicks of the first and third candles do not overlap, leaving a price range between them that the market traded in only one direction. A fair value gap forms when fast, aggressive buying or selling creates an imbalance, and traders watch for price to return to the FVG before the trend continues.
Traders use 2 main entry strategies to trade a fair value gap: 1) a position opened when price returns into the FVG, and 2) a position opened after a confirmation candle forms inside the FVG, with a stop-loss beyond the FVG and a price target at the next swing high or swing low.
What is a Fair Value Gap (FVG) in Trading?
FVG in trading means fair value gap, a price action candlestick pattern that marks a price range where buyers and sellers did not trade in both directions. A fair value gap needs 3 candles in a row: 1) candle 1, which sets the high or low the gap is measured from, 2) candle 2, a large, fast candle called the displacement candle, and 3) candle 3, whose wick does not overlap the wick of candle 1.
The fair value gap is the price range between the wick of candle 1 and the wick of candle 3, and the displacement candle sits across that range. Traders also call a fair value gap a price inefficiency, because the market skipped over the range too fast for normal two-way trading.
The FVG meaning comes from fair value, the price range where buyers and sellers agreed on value while price traded sideways before the displacement candle. When the displacement candle leaves that range quickly, the market sets a new fair value, and the price range the displacement candle skipped becomes the gap.
The fair value gap concept was popularized by the Inner Circle Trader (ICT) and is a core part of smart money concepts (SMC), where traders read an FVG as the trace left by institutional traders placing large orders. Traders treat an FVG like a support or resistance level, and an FVG forms faster than a classic support or resistance level because an FVG needs only 3 candles.
Fair Value Gap vs Price Gap: What Is the Difference?
A price gap, also called a normal gap, is a jump between 2 candles with no trading at all in between, while a fair value gap is a range that the displacement candle traded through once. A price gap needs only 2 candles, and a fair value gap needs 3.
Price gaps mostly appear in markets that close, such as a stock that opens far higher or lower after news released overnight or over a weekend. Fair value gaps form during trading hours in every market, including 24/7 markets like Bitcoin, where price gaps are rare.
Price gaps and fair value gaps both belong to a wider group traders call liquidity voids, which are areas where price moved fast with little resistance.
| Criteria | Fair value gap | Price gap | Liquidity void |
|---|---|---|---|
| Candles involved | 3 | 2 | Any number |
| How it forms | The displacement candle moves fast during trading hours | No trading between 2 candles, usually while the market is closed | Any fast move with little resistance |
| Where it is common | Every market, including 24/7 markets like crypto | Stocks at the market open, especially after a weekend | Covers both fair value gaps and price gaps |
How Does a Fair Value Gap Work?
A fair value gap works in 2 stages: 1) aggressive orders create the FVG, and 2) price later returns to the FVG to trade the range the displacement candle skipped.
Why Do Fair Value Gaps Form?
Fair value gaps form when buyers or sellers become far more aggressive than the other side. When buyers overwhelm sellers, the displacement candle rises so fast that a bullish FVG is left behind, and when sellers overwhelm buyers, the displacement candle leaves a bearish FVG.
An imbalance never means more buy orders than sell orders, because every trade needs a buyer and a seller. An imbalance means one side pushed price through a range so quickly that resting orders at many prices never got a chance to trade.
The fast move usually comes from news, such as an economic data release or an earnings report, or from a breakout from a sideways range during high volatility.
Traders often describe a fair value gap as an untraded price range, yet the displacement candle did trade through every price inside the FVG. The displacement candle traded that range only once and only in one direction, so few orders were matched there, and the chart shows the range as thinly traded.
Why Does Price Return to a Fair Value Gap?
Price often returns to a fair value gap because the resting orders inside the FVG were never matched during the fast move. Institutional traders who still need to fill large orders want price to come back to those levels, so the FVG acts like a magnet for price.
A return to the FVG is called a retest, and traders treat a retest in the direction of the existing trend as the trade signal. A retest on its own is no reversal signal, so traders wait to see how price reacts inside the FVG before opening a position.
Price does not always come back. In a strong trend, price can keep running away from an FVG and never retest the FVG.
How Do You Identify a Fair Value Gap on a Chart?
Traders identify a fair value gap on a chart in 4 steps:
- Find the displacement candle. Look for a candle with a large body compared with the candles on its left and right.
- Compare the wicks of candle 1 and candle 3. For a bullish FVG, the high of candle 1 must stay below the low of candle 3. For a bearish FVG, the low of candle 1 must stay above the high of candle 3.
- Mark the FVG with a rectangle. Draw the rectangle from the wick of candle 1 to the wick of candle 3 and extend the rectangle to the right, so you can see when price returns. On TMGM MT4 and MT5, use the Rectangle tool to draw the FVG.
- Mark the 50% level. Draw a line through the middle of the FVG, a level ICT traders call consequent encroachment. When price pulls back into the FVG and holds the 50% level, many traders see the FVG as stronger.
A fair value gap indicator marks FVGs automatically, and TMGM MT4 and MT5 both accept custom indicators. Traders still check the trend and the higher timeframe before trading an FVG that an indicator marks, because many marked FVGs are noise.
Which Timeframes and Markets Work Best for Fair Value Gaps?
Fair value gaps form on every timeframe, from the 1-minute chart to the daily chart. The timeframe changes how many FVGs appear and how long each FVG holds as support or resistance.
| Timeframe group | Examples | What traders see | Common use |
|---|---|---|---|
| Lower timeframes | 1-minute, 5-minute | Many FVGs, and most fill quickly | Timing the entry |
| Middle timeframes | 15-minute, 1-hour | Fewer FVGs worth marking | Finding the FVG to trade |
| Higher timeframes | 4-hour, daily | The fewest FVGs, which hold as support or resistance for longer | Reading the trend and support or resistance levels |
Fair value gaps work in forex, stocks, futures, commodities and crypto, and FVGs tend to work best in markets with high trading volume. For FVG in forex trading, the FVGs that form during high-volume trading hours tend to be the most reliable.
When Is a Fair Value Gap Filled?
A fair value gap is filled when price trades back through the whole FVG and a candle closes beyond the far edge, which is below the high of candle 1 for a bullish FVG or above the low of candle 1 for a bearish FVG. An unfilled FVG still acts as potential support or resistance, and traders stop using a filled FVG for new trades in the direction of the FVG.
Check that an FVG is unfilled before planning a trade in the direction of the FVG, because a filled FVG no longer acts as support or resistance in that direction.
A filled FVG can flip into an inverse fair value gap (IFVG). When a candle closes below a bullish FVG, the old support often turns into resistance, and when a candle closes above a bearish FVG, the old resistance often turns into support, so traders trade the IFVG in the new direction on its next retest.
Fair Value Gap Example & Strategy: How Do You Trade Bullish and Bearish FVGs?
The FVG trading strategy turns a fair value gap into a trade plan with an entry, a stop-loss and a price target. Our FVG examples follows the same 4 steps:
- Check the trend. Trade bullish FVGs in an uptrend and bearish FVGs in a downtrend, and read the trend on a higher timeframe.
- Wait for the retest. Do not open a position until price returns to the FVG.
- Enter the trade with one of 2 entry strategies. 1) Open the position as soon as price returns into the FVG, or 2) wait for a confirmation candle inside the FVG, such as a candle with a long rejection wick or an engulfing candle, that holds the 50% level.
- Set the stop-loss and price target before sizing the position. Place the stop-loss just beyond the far edge of the FVG, and set the price target at the next swing high or swing low, an opposing unfilled FVG, or the prior day's high or low.
Traders choose between 2 stop-loss placements: 1) just beyond the far edge of the FVG, which gives a closer stop-loss and a larger position size for the same risk, and 2) a safer stop-loss beyond the displacement candle, which survives a deeper retest but needs a smaller position size. Size the position from the stop-loss distance, so the account risk stays the same whichever stop-loss you choose.
| 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 2 FVG examples that follow apply the FVG trading strategy to a bullish FVG on EUR/USD and a bearish FVG on XAU/USD. All prices in both fair value gap examples are illustrative.
Bullish FVG Example on EUR/USD
A bullish FVG forms on the EUR/USD 1-hour chart during an uptrend. The displacement candle rallies from 1.1209 to 1.1255, the high of candle 1 is 1.1212 and the low of candle 3 is 1.1228, so the FVG runs from 1.1212 to 1.1228 with the 50% level at 1.1220.
Six hours later, price pulls back into the FVG. A confirmation candle wicks down to 1.1221, holds the 50% level and closes at 1.1233.
| Trade plan | Entry 1: on the retest | Entry 2: after the confirmation candle |
|---|---|---|
| Entry | Long position at 1.1228, when price first touches the top of the FVG | Long position at 1.1233, the close of the confirmation candle |
| Stop-loss | 1.1209, just below the high of candle 1 (safer stop-loss: 1.1203, below the displacement candle) | 1.1209 (safer stop-loss: 1.1203) |
| Price target | 1.1280, the next swing high | 1.1280, the next swing high |
| Risk-reward ratio | About 1:2.7 (19 pips risk, 52 pips reward) | About 1:2 (24 pips risk, 47 pips reward) |
If a candle had closed below 1.1212 before the retest, the bullish FVG would have been filled and the plan for the long position cancelled.
Bearish FVG Example on XAU/USD
A bearish FVG forms on the XAU/USD 15-minute chart during a downtrend after a US data release. The displacement candle falls from 4,154.00 to 4,131.00, the low of candle 1 is 4,152.40 and the high of candle 3 is 4,144.60, so the FVG runs from 4,144.60 to 4,152.40 with the 50% level at 4,148.50.
Two hours later, price rallies back into the FVG. A confirmation candle wicks up to 4,147.90, holds below the 50% level and closes at 4,141.80.
| Trade plan | Entry 1: on the retest | Entry 2: after the confirmation candle |
|---|---|---|
| Entry | Short position at 4,144.60, when price first touches the bottom of the FVG | Short position at 4,141.80, the close of the confirmation candle |
| Stop-loss | 4,153.20, just above the low of candle 1 (safer stop-loss: 4,156.00, above the displacement candle) | 4,153.20 (safer stop-loss: 4,156.00) |
| Price target | 4,120.00, the next swing low | 4,120.00, the next swing low |
| Risk-reward ratio | About 1:2.9 ($8.60 risk, $24.60 reward per ounce) | About 1:1.9 ($11.40 risk, $21.80 reward per ounce) |
If a candle had closed above 4,152.40 before the retest, the bearish FVG would have been filled and the plan for the short position cancelled.
Which FVG Is the Strongest?
The strongest fair value gaps pass 4 checks:
- The FVG forms with the trend. A bullish FVG in an uptrend or a bearish FVG in a downtrend has a better chance of holding than an FVG against the trend.
- The displacement candle causes a breakout. The displacement candle breaks and closes beyond the most recent swing high or swing low, which SMC traders call a break of structure (BOS) because the candle changes the market structure, the order of swing highs and swing lows.
- The FVG sits at a higher-timeframe key level. An FVG that lines up with a support or resistance level from the 4-hour or daily chart holds more often than an FVG in open space.
- The FVG is unfilled and on its first retest. The first retest of an FVG tends to give the strongest reaction, and a filled FVG is no longer used.
An FVG that overlaps an order block, a level where institutional traders placed large orders, gives traders one more reason to take the trade. Many traders find the FVG on a higher timeframe and time the entry on a lower timeframe, so the FVG and the trend both come from the higher timeframe.
| Pro Tip: Mark FVGs on the 4-hour or daily chart first, then switch to the 15-minute chart to time the entry inside the higher-timeframe FVG. |
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What Is the Difference Between a Bullish and Bearish FVG?
A bullish FVG forms when price rises sharply and the high of candle 1 stays lower than the low of candle 3. A bullish FVG sits below the displacement candle and acts as potential support, a magnet that often pulls price back down before the uptrend continues.
A bearish FVG forms when price falls sharply and the low of candle 1 stays higher than the high of candle 3. A bearish FVG sits above the displacement candle and acts as potential resistance when price rallies back up into the bearish FVG.
| Criteria | Bullish FVG | Bearish FVG |
|---|---|---|
| Formation | Price rises sharply, and the high of candle 1 stays below the low of candle 3 | Price falls sharply, and the low of candle 1 stays above the high of candle 3 |
| FVG location | Below the displacement candle | Above the displacement candle |
| Role | Potential support | Potential resistance |
| Reaction traders watch for | Price dips into the FVG, then continues higher | Price rallies into the FVG, then continues lower |
Is FVG a Good Strategy?
FVG trading can be a good strategy when traders use the FVG together with the trend, a stop-loss and a price target. A fair value gap on its own only shows where price may react, so the result depends on the trade plan around the FVG.
Traders like fair value gaps for 3 reasons: 1) an FVG gives an entry at a better price than chasing the displacement candle, 2) an FVG forms faster than a classic support or resistance level, and 3) the same three-candle pattern works across forex, stocks, commodities and crypto.
Fair value gaps also have 3 limits: 1) price can keep moving in the same direction and never return to the FVG, 2) FVGs appear on almost every chart, so many FVGs are noise, and 3) high volatility around news can push price straight through an FVG. Because an FVG needs only 3 candles, an FVG forms quickly but can be less accurate than a level built from many candles.
What Are the Common Mistakes When Trading Fair Value Gaps?
Most losing fair value gap trades come from 4 mistakes:
- Trading every FVG. Small FVGs on lower timeframes and FVGs inside a sideways range fill quickly, so trade only the FVGs that form with the trend at a key level.
- Ignoring the higher-timeframe trend. An FVG against the higher-timeframe trend has a lower chance of holding than an FVG with the higher-timeframe trend.
- Sizing the position before setting the stop-loss. Set the stop-loss beyond the FVG or the displacement candle first, then size the position from that stop-loss distance.
- Trading a filled FVG. Once a candle closes beyond the far edge of an FVG, the FVG no longer acts as support or resistance in its original direction, so cancel any trade plan built on that FVG.
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FAQs About Fair Value Gaps
Do fair value gaps always get filled?
No, fair value gaps do not always get filled. Price often returns to retest an FVG, but in a strong trend price can run away from the FVG and never come back, so every FVG trade needs a stop-loss.
What is the difference between a fair value gap and an order block?
A fair value gap shows where price moved too fast and left a thinly traded range, while an order block shows where institutional traders placed large orders. Traders often use both together, and an FVG that overlaps an order block gives a stronger trade signal than either one alone.
Is a fair value gap the same as an imbalance?
A fair value gap is the result of an imbalance. The imbalance is the cause, when buyers or sellers are far more aggressive than the other side, and the FVG is the effect left on the chart, which is why many traders use the two terms for the same thing.
Do news events create fair value gaps?
Yes, news events such as economic data releases and earnings reports often create large fair value gaps, because the news triggers fast, aggressive buying or selling. Trading right after a news release carries extra risk, since spreads widen and price can move straight through an FVG.
