Fair Value Gaps (FVG)
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A Fair Value Gap (FVG) is a three-candle pattern where the middle candle's body is so large that the wicks of the first and third candles do not overlap, leaving a visible gap on the chart. This imbalance indicates that price moved too aggressively in one direction, leaving behind unfilled orders. Markets tend to revisit these gaps to "rebalance" before continuing the trend, making FVGs valuable reference points for identifying potential entry zones and understanding institutional price delivery.
How to Identify Fair Value Gaps
To spot a bullish FVG, look for a three-candle sequence where the high of the first candle is lower than the low of the third candle — the gap between them is the FVG zone. For a bearish FVG, the low of the first candle must be higher than the high of the third candle. The wider the gap, the more aggressive the move was and the stronger the imbalance. FVGs are most significant when they form as part of a structural break or after a liquidity sweep, confirming institutional involvement in the move.
Trading Strategies with FVGs
The most common approach is to wait for price to retrace into the FVG zone before entering in the direction of the original impulse. Place a limit order at the 50% level of the FVG (known as consequent encroachment) for optimal entries. Stop losses go below the FVG for bullish setups or above for bearish setups. Some traders wait for price to fill the entire gap before expecting a reaction, while others trade from the first touch. Combining FVG entries with order block confluence significantly increases the probability of a successful trade.
FVG Invalidation and Mitigation
An FVG is considered mitigated when price returns and trades through the gap zone. Once fully filled, the imbalance is resolved and the FVG no longer serves as a valid entry point. Partial fills — where price retraces into the gap but does not close through it — suggest the zone still holds significance. An FVG is invalidated when the broader market structure shifts against it, such as a bearish FVG losing relevance after a bullish structural break. Always consider FVGs within the context of the prevailing trend and market structure.
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Frequently Asked Questions
Do Fair Value Gaps always get filled?
Not always, but they often do. In trending markets, FVGs created in the direction of the trend tend to act as support or resistance on retests. However, in very strong momentum moves, some FVGs may never be revisited. The higher the timeframe of the FVG, the more likely it is to attract price back for a fill.
What is consequent encroachment in FVG trading?
Consequent encroachment (CE) is the 50% midpoint of a Fair Value Gap. Many SMC traders use this level as their primary entry point because it represents the equilibrium of the imbalance zone. Entering at the CE provides a better risk-to-reward ratio compared to entering at the edge of the FVG, though there is a risk price reverses before reaching it.
How do FVGs differ from traditional chart gaps?
Traditional chart gaps occur between the close of one candle and the open of the next (common in stocks over weekends). Fair Value Gaps are intraday imbalances visible in the wick structure of three consecutive candles — they can appear on any market and any timeframe, including 24-hour markets like Forex. FVGs are a more granular measure of price inefficiency.
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