Fair value gaps are areas on a chart where price moved so quickly that it left an imbalance. These gaps often act as magnets, pulling price back to fill them. Understanding FVGs can help you find better entry points and set logical targets. This guide will teach you everything about fair value gap trading.
What is a Fair Value Gap?
A fair value gap (FVG) is a three-candle pattern where the middle candle's body is so large that the wicks of the surrounding candles do not overlap. This creates a gap or void where price did not trade efficiently, leaving an imbalance that the market often revisits.
Key concept: Markets seek equilibrium. When price moves too fast in one direction, it creates an imbalance. The market has a tendency to return to these imbalanced areas to fill the gap before continuing.
How to Identify Fair Value Gaps
Bullish Fair Value Gap
A bullish FVG forms during an upward move when the wicks of the first and third candles do not touch. The gap is between the high of the first candle and the low of the third candle.
Identifying a Bullish FVG
- Find three consecutive candles during an up move
- Look at the high of candle 1 and the low of candle 3
- If there is a gap between them, you have a bullish FVG
- The FVG zone is from candle 1's high to candle 3's low
- Price often returns to fill this gap before continuing up
Bearish Fair Value Gap
A bearish FVG forms during a downward move when the wicks of the first and third candles do not touch. The gap is between the low of the first candle and the high of the third candle.
Identifying a Bearish FVG
- Find three consecutive candles during a down move
- Look at the low of candle 1 and the high of candle 3
- If there is a gap between them, you have a bearish FVG
- The FVG zone is from candle 1's low to candle 3's high
- Price often returns to fill this gap before continuing down
Why Fair Value Gaps Form
Fair value gaps appear when there is strong momentum caused by institutional order flow. Large orders can push price so quickly that normal back-and-forth trading does not occur, leaving behind these imbalanced areas.
- News events: Major announcements can cause rapid price moves
- Session opens: Market opens often see strong momentum
- Breakouts: When key levels break, price moves quickly
- Institutional accumulation/distribution: Large orders move markets
Trading Fair Value Gaps
Strategy 1: FVG as Entry Zone
After a bullish move creates a bullish FVG, wait for price to return to the gap. Look for a reaction within the FVG to enter long. The idea is that the FVG acts as support.
Bullish FVG Entry Example
Trading with the trend:
- Market is in an uptrend on the 4-hour chart
- A strong impulse creates a bullish FVG between $100 and $102
- Price continues up to $110 then begins pulling back
- Price retraces into the FVG zone at $100-$102
- Enter long when price shows rejection in the zone
- Stop loss below the FVG at $99
- Target the previous high or higher
Strategy 2: FVG as Target
Use unfilled FVGs as targets for your trades. If you are in a short position and there is an unfilled bullish FVG below, that FVG can serve as a logical target because price often seeks to fill gaps.
Strategy 3: FVG Confluence
FVGs become more powerful when they align with other levels like order blocks, support and resistance, or Fibonacci levels. Look for confluence to increase the probability of a trade.
Filled vs. Unfilled FVGs
Full Fill
A full fill occurs when price retraces completely through the FVG, trading through the entire zone. Once fully filled, the FVG loses most of its significance.
Partial Fill
A partial fill occurs when price enters the FVG but does not trade through the entire zone. Often price will react from the midpoint (50%) of the FVG, which is called the consequent encroachment.
Consequent Encroachment
The consequent encroachment (CE) is the 50% level of the FVG. Many traders watch this level for reactions because it represents the midpoint of the imbalance.
FVG Trading Tips
- Trade with the trend: Use bullish FVGs in uptrends, bearish FVGs in downtrends
- Higher timeframe FVGs are stronger: A 4-hour FVG holds more weight than a 15-minute FVG
- Combine with order blocks: FVGs that overlap with order blocks are especially powerful
- Watch for multiple FVGs: Price may fill several gaps in a pullback
- Be patient: Not all FVGs get filled immediately; some take days or weeks
Common Mistakes to Avoid
- Trading every FVG: Focus on FVGs that align with the trend and key levels
- Ignoring context: An FVG in a strong trend is different from one in a range
- Stop loss too tight: Place stops beyond the FVG, not inside it
- Forcing fills: Not every FVG will be filled before price continues
- Lower timeframe only: Check higher timeframes for more significant gaps
FVGs and Market Structure
Fair value gaps work best when combined with market structure analysis. Look for FVGs that form during breaks of structure or at key support and resistance areas.
Pro tip: The most reliable FVG trades occur when price pulls back to fill an FVG that formed during a break of structure, and the FVG is located in the premium or discount zone of the recent move.
Analyze Your FVG Trades
Pro Trader Dashboard helps you track your trading performance. See how your FVG entries perform compared to other setups and refine your strategy over time.
Summary
Fair value gaps are areas of price imbalance that often act as magnets for future price movement. By learning to identify bullish and bearish FVGs, you can find better entry points and set logical targets. Remember to trade FVGs in the context of the overall trend and combine them with other analysis tools for the best results.
Continue your education with our guide on liquidity zones or learn about inducement patterns.