Fair value gaps (FVG)

A fair value gap is a small band of price where trading was effectively one-sided. Price moved so quickly that the other side of the market never got a chance to transact there. It is also called an imbalance or an inefficiency, and it shows up as a three-candle pattern that you can spot in a couple of seconds once you know the shape.

Take any three candles in a row. In a bullish move, if the low of candle three is above the high of candle one, the band between those two prices is a bullish fair value gap. In a bearish move it is the mirror: if the high of candle three is below the low of candle one, the band between them is a bearish fair value gap. The big middle candle is the one that did the damage.

• Nobody was able to buy or sell in that band, so unfilled orders remain sitting there waiting.
• Large participants cannot fill a full position inside one violent candle; they need a retrace to complete it.
• Traders who missed the move treat the gap as a discount (bullish) or a premium (bearish) entry area.
• Markets tend to rebalance: a one-sided move gets revisited so both sides can transact, then the original direction usually resumes.

1. 1Mark the gap on the 1-hour or 4-hour chart after a strong impulsive move. Ignore gaps left by tiny, choppy candles.
2. 2Wait for price to pull back into the gap — many traders use the midpoint of the band as the reference level.
3. 3Look for a reaction candle inside the gap before entering. Entering just because price touched it is how you get run over.
4. 4Place the stop beyond the far side of the gap or beyond the swing that created it, and target the high or low the impulse produced.