A fair value gap (FVG) takes the form of a three-candle price pattern in technical analysis. The first and third candles have wicks that do not overlap. Between them is a range traded in one direction only. An FVG develops when rapid, aggressive buying or selling creates an imbalance. Traders monitor this range for a price return before the trend continues.
There are 2 principal entry strategies for trading a fair value gap: 1) enter as price returns to the FVG, or 2) enter after a confirmation candle appears within it. Place the stop-loss outside the FVG and the price target at the next swing high or swing low.
Fair Value Gap (FVG): The Three-Candle Trading Pattern
FVG is the trading abbreviation for fair value gap. This price action candlestick pattern highlights a range that lacked trading in both directions between buyers and sellers. Its structure comprises 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 leaves a wick that does not overlap candle 1's wick.
Spanned by the displacement candle, the range separating the wicks of candle 1 and candle 3 defines the fair value gap. It is also described as a price inefficiency: price crossed the range too rapidly for normal two-way trading to occur.
The name refers to fair value, meaning the range in which buyers and sellers agreed on value during sideways trading before the displacement candle. A rapid departure from this range establishes a new fair value. The range skipped by the displacement candle then constitutes the gap.
Popularised by the Inner Circle Trader (ICT), the fair value gap is a central element of smart money concepts (SMC). Under this framework, an FVG represents evidence of institutional traders placing large orders. An FVG serves as a support or resistance level for traders. Requiring just 3 candles, it develops sooner than a conventional support or resistance level.
3 Candles vs 2: Fair Value Gap and Price Gap
A price gap is also known as a normal gap. It separates 2 candles with a jump across a range where no trading occurred. The displacement candle, however, has traded once through the range of a fair value gap. This distinction means a price gap requires only 2 candles, compared with 3 for a fair value gap.
Markets with closing hours are where price gaps mainly occur. Overnight or weekend news, for example, can leave a stock opening well above or below its previous level. During trading hours, fair value gaps can develop in any market. That includes 24/7 markets such as Bitcoin, where price gaps are unusual.
Both gap types sit within the broader classification of liquidity voids. These are ranges crossed rapidly by price with little resistance.
| Comparison | Fair value gap | Price gap | Liquidity void |
|---|---|---|---|
| Candle count | 3 | 2 | Any number of candles |
| Formation | Fast displacement-candle movement during trading hours | A range with no trading between 2 candles, typically during market closure | Rapid movement encountering little resistance |
| Typical occurrence | Across all markets, including 24/7 crypto markets | At the stock market open, notably after a weekend | Encompasses fair value gaps and price gaps |
2 Stages Behind a Fair Value Gap
The FVG process comprises 2 stages: 1) aggressive orders produce the gap, followed by 2) a return in price to trade the range skipped by the displacement candle.
Fair Value Gap Formation: Aggressive Order Flow
A fair value gap results from one side of the market becoming substantially more aggressive than the other. Buyers overpowering sellers drive a displacement candle sharply upwards, leaving a bullish FVG. Sellers overpowering buyers produce a displacement candle that leaves a bearish FVG.
Every transaction has both a buyer and a seller, so an imbalance cannot mean that buy orders exceed sell orders in number. Instead, one side forces price across a range before resting orders at many levels have an opportunity to execute.
Economic data, earnings reports and other news usually trigger the rapid move. Another source is a breakout from sideways trading when volatility is high.
Calling an FVG an untraded range is common, but the displacement candle actually traded at every price within it. The distinction is that it crossed the range once, in one direction only. With few orders matched along the way, the range appears thinly traded on the chart.
Unmatched Orders Draw Price Back to the FVG
Resting orders left unmatched during the rapid move often attract price back to a fair value gap. Institutions still seeking to complete large orders want those price levels revisited. As a result, the FVG can act as a price magnet.
This return is termed a retest. Traders consider it a trade signal when it aligns with the existing trend. A retest alone does not indicate a reversal; the decision to enter therefore follows an assessment of price behaviour inside the FVG.
A return may never occur. A strong trend can carry price progressively further from an FVG without a retest.
4 Steps to Identify a Fair Value Gap
Chart identification follows 4 steps:
- Locate the displacement move. Seek a candle with a body substantially larger than the bodies of the candles on either side.
- Check the wick separation between candles 1 and 3. In a bullish FVG, candle 1's high must lie below candle 3's low. In a bearish FVG, candle 1's low must lie above candle 3's high.
- Draw a rectangle around the gap. Use the wicks of candle 1 and candle 3 as the boundaries, extending the rectangle rightwards to track any price return. TMGM MT4 and MT5 provide the Rectangle tool for marking the FVG.
- Plot the 50% line. Bisect the FVG with a line. Among ICT traders, this midpoint is known as consequent encroachment. Many traders attach greater strength to an FVG when a pullback enters it but holds the 50% level.
A fair value gap indicator can automate gap marking. Custom indicators are available on both TMGM MT4 and MT5. Many detected FVGs are noise, however, so traders assess the trend and higher timeframe before trading a marked gap.
1-Minute to Daily: FVG Timeframes and Markets
From 1-minute charts to daily charts, every timeframe can display fair value gaps. Frequency varies with the timeframe, as does the period for which an FVG provides support or resistance.
| Timeframe category | Chart examples | Typical pattern | Trading application |
|---|---|---|---|
| Short-term timeframes | 1-minute, 5-minute | High FVG frequency; most gaps fill rapidly | Entry timing |
| Intermediate timeframes | 15-minute, 1-hour | Fewer gaps merit marking | Tradeable FVG selection |
| Long-term timeframes | 4-hour, daily | Lowest FVG frequency; support or resistance lasts longer | Trend analysis and support or resistance assessment |
High-volume markets tend to provide the best conditions for FVGs, which work across forex, stocks, futures, commodities and crypto. Within forex trading, gaps created during high-volume trading hours tend to be most reliable.
FVG Fill: A Close Beyond the Far Boundary
To fill a fair value gap, price must retrace its full range and a candle must close beyond the far boundary. That boundary is candle 1's high for a bullish FVG, with the close below it; for a bearish FVG, the close must be above candle 1's low. Before filling, an FVG offers potential support or resistance. After filling, traders no longer initiate trades in its original direction using that gap.
Establish that the gap remains unfilled before planning a trade in its direction. Once filled, it ceases to provide support or resistance in that direction.
Filling can transform an FVG into an inverse fair value gap (IFVG). A close 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 the new direction.
2 Fair Value Gap Examples & Bullish and Bearish FVG Trading Strategies
An FVG trading strategy builds an entry, stop-loss and price target around the gap. Each example below uses these 4 steps:
- Establish trend direction. Use a higher timeframe to assess the trend. Select bullish FVGs during an uptrend and bearish FVGs during a downtrend.
- Allow price to retest. Keep the position unopened until price comes back to the FVG.
- Select one of 2 entry methods. 1) Enter immediately on the return into the gap, or 2) await a confirmation candle within it that holds the 50% level. This could be an engulfing candle or a candle displaying a long rejection wick.
- Define the stop-loss and target, then calculate position size. Put the stop-loss just outside the FVG's far boundary. Target the next swing high or swing low, an opposing unfilled FVG, or the previous day's high or low.
Stop-loss placement offers 2 choices: 1) just outside the FVG's far boundary, providing a tighter stop 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 stop-loss distance. This keeps account risk unchanged between the two placements.
| 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 the strategy using a bullish EUR/USD FVG and a bearish XAU/USD FVG. Prices throughout both examples are illustrative.
1.1212–1.1228: EUR/USD Bullish FVG Example
On the EUR/USD 1-hour chart, an uptrend produces a bullish FVG. A displacement candle advances from 1.1209 to 1.1255. Candle 1 records a high of 1.1212, while candle 3 records a low of 1.1228. These levels define the FVG at 1.1212 to 1.1228, with its 50% midpoint at 1.1220.
Six hours pass before price retraces into the gap. The confirmation candle reaches 1.1221 with its lower wick, holds the 50% level and finishes at 1.1233.
| Trade setup | Entry 1: retest execution | Entry 2: confirmation-candle execution |
|---|---|---|
| Entry level | Buy at 1.1228 as price initially touches the FVG's upper boundary | Buy at 1.1233 when the confirmation candle closes |
| Stop-loss level | 1.1209, immediately below candle 1's high (safer stop-loss: 1.1203, beneath the displacement candle) | 1.1209 (safer stop-loss at 1.1203) |
| Target level | Next swing high at 1.1280 | Next swing high at 1.1280 |
| Risk-to-reward ratio | Approximately 1:2.7 (risk: 19 pips; reward: 52 pips) | Approximately 1:2 (risk: 24 pips; reward: 47 pips) |
A candle close below 1.1212 ahead of the retest would have filled this bullish FVG, cancelling the planned long trade.
4,144.60–4,152.40: XAU/USD Bearish FVG Example
Following a US data release, a downtrend on the XAU/USD 15-minute chart produces a bearish FVG. The displacement candle declines from 4,154.00 to 4,131.00. With candle 1's low at 4,152.40 and candle 3's high at 4,144.60, the gap spans 4,144.60 to 4,152.40. Its 50% midpoint is 4,148.50.
Two hours pass before price rebounds into the gap. The confirmation candle's upper wick reaches 4,147.90 but remains below the 50% level. The candle finishes at 4,141.80.
| Trade setup | Entry 1: retest execution | Entry 2: confirmation-candle execution |
|---|---|---|
| Entry level | Sell short at 4,144.60 as price initially touches the FVG's lower boundary | Sell short at 4,141.80 when the confirmation candle closes |
| Stop-loss level | 4,153.20, immediately above candle 1's low (safer stop-loss: 4,156.00, beyond the displacement candle) | 4,153.20 (safer stop-loss at 4,156.00) |
| Target level | Next swing low at 4,120.00 | Next swing low at 4,120.00 |
| Risk-to-reward ratio | Approximately 1:2.9 (per ounce: $8.60 risk, $24.60 reward) | Approximately 1:1.9 (per ounce: $11.40 risk, $21.80 reward) |
A candle close above 4,152.40 ahead of the retest would have filled this bearish FVG, cancelling the planned short trade.
4 Checks for the Strongest FVGs
The strongest fair value gaps meet 4 criteria:
- Alignment with the prevailing 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.
- A breakout driven by the displacement candle. The candle breaches the latest swing high or swing low and closes beyond it. SMC traders describe this as a break of structure (BOS), reflecting a change in market structure, or the sequence of swing highs and swing lows.
- Confluence with a key higher-timeframe level. Gaps aligned with 4-hour or daily support or resistance hold more frequently than gaps located away from such levels.
- An unfilled gap undergoing its first retest. The initial retest tends to produce the strongest response. A filled FVG is no longer used.
Overlap with an order block adds another reason for taking a trade. An order block identifies a level where institutional traders placed large orders. A common approach is to select the gap on a higher timeframe and refine entry timing on a lower one. Both the trend assessment and the FVG then originate from the higher timeframe.
| Practical Tip: Begin by marking gaps on the 4-hour or daily chart. Then use the 15-minute chart to time an entry within that higher-timeframe FVG. |
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Bullish vs Bearish FVGs: Support and Resistance
A bullish FVG follows a sharp price advance, with candle 1's high below candle 3's low. Located beneath the displacement candle, it provides potential support. It also acts as a magnet, often drawing price lower into the gap before the uptrend resumes.
A bearish FVG follows a sharp decline, with candle 1's low above candle 3's high. Located above the displacement candle, it provides potential resistance as price rebounds into the gap.
| Comparison | Bullish FVG | Bearish FVG |
|---|---|---|
| Formation conditions | Sharp price advance; candle 1's high remains below candle 3's low | Sharp price decline; candle 1's low remains above candle 3's high |
| Gap position | Beneath the displacement candle | Over the displacement candle |
| Market function | Possible support | Possible resistance |
| Expected reaction to monitor | A pullback into the gap followed by renewed gains | A rebound into the gap followed by renewed declines |
FVG Strategy: Benefits and Limitations
Combining an FVG with trend analysis, a stop-loss and a price target can make FVG trading a good strategy. In isolation, the gap identifies only a possible reaction zone. The surrounding trade plan determines the outcome.
The appeal rests on 3 features: 1) entering at an FVG offers a better price than chasing the displacement candle, 2) gaps develop sooner than conventional support or resistance levels, and 3) the three-candle structure applies across forex, stocks, commodities and crypto.
There are also 3 limitations: 1) price may continue in its original direction without revisiting the gap, 2) near-universal occurrence across charts means many FVGs are noise, and 3) news-driven volatility can carry price directly through a gap. Formation takes only 3 candles. That makes FVGs quick to develop, but potentially less accurate than levels established across many candles.
4 Common Fair Value Gap Trading Errors
Most unsuccessful FVG trades stem from 4 errors:
- Taking every gap as a trade. Lower-timeframe small gaps and gaps within sideways ranges tend to fill rapidly. Restrict trades to trend-aligned FVGs at key levels.
- Disregarding the broader timeframe's trend. A gap opposing the higher-timeframe trend is less likely to hold than one aligned with it.
- Calculating position size before the stop-loss. First place the stop-loss outside the FVG or beyond the displacement candle. Use that distance to calculate the position size.
- Using an already filled gap. A close past the gap's far boundary removes its support or resistance role in the original direction. Cancel any trade plan based on that FVG.
Before committing real money, practise identifying and trading FVGs through a free TMGM demo account.
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Fair Value Gaps: Frequently Asked Questions
Is every fair value gap eventually filled?
No. Filling is not guaranteed. Although price frequently retests an FVG, a strong trend can take it further away without a return. A stop-loss is therefore necessary for every FVG trade.
Fair value gap vs order block: what does each show?
An FVG identifies a thinly traded range created by excessively rapid price movement. An order block identifies where institutional traders placed large orders. Using them together is common: overlap between the two provides a stronger trade signal than either alone.
Fair value gap and imbalance: are they equivalent?
The relationship is cause and effect. An imbalance occurs when buyers or sellers act much more aggressively than the opposing side; the resulting FVG is what remains on the chart. Many traders consequently use the terms interchangeably.
News releases: can they generate fair value gaps?
Yes. Economic data releases, earnings reports and other news often generate large FVGs by prompting rapid, aggressive buying or selling. Immediately after a release, trading carries additional risk: spreads widen, and price can pass straight through the gap.
