A Fair Value Gap (FVG) is a technical trading concept indicating a price imbalance formed by a rapid, impulsive move where only one side of the market (buying or selling) is present. It appears as a three-candle sequence where the wicks of the first and third candles do not overlap, signaling a “gap” in liquidity.
Key Aspects of FVGs:
- Formation: An FVG occurs during high-momentum moves, often caused by institutional buying or selling, leaving a “void” of trading activity.
- Identification: It is characterized by a large, long-bodied middle candle (often a marubozu).
- Bullish FVG: Low of the third candle is higher than the high of the first candle.
- Bearish FVG: High of the third candle is lower than the low of the first candle.
- Trading Strategy: Traders often wait for the price to return to (“fill” or “mitigate”) this gap, using it as a high-probability entry point for a reversal or continuation, expecting the market to rebalance.
- Validity: The most reliable gaps are unmitigated (not yet touched by price) and align with the current trend (e.g., buying in an uptrend).
FVGs are frequently used in Smart Money Concepts (SMC) trading to identify areas of inefficiency where price may return before continuing in its original direction.
Table of Contents
Mastering Fair Value Gaps (FVG) – How to use them in trading?
In this, I’ll explain the concept of the Fair Value Gap (FVG), how it forms, and how you can use it to identify high-probability trading opportunities. You’ll learn how to spot FVGs on a chart, understand their significance in price action, and apply a simple strategy to trade them effectively.
What will be explained:
- What is a FVG?
- How can a FVG occur?
- What is a bullish FVG?
- What is a bearish FVG?
- How to trade a FVG?
What is a Fair Value Gap (FVG)?
A FVG is a technical concept used by traders to identify inefficiencies in price movement on a chart. The idea behind a fair value gap is that during periods of strong momentum, price can move so quickly that it leaves behind a “gap” where not all buy and sell orders were able to be executed efficiently. This gap creates an imbalance in the market, which price may later revisit in an attempt to rebalance supply and demand.
A fair value gap is typically observed within a sequence of three candles (or bars). The first candle marks the beginning of a strong move. The second candle shows a significant directional push, either bullish or bearish, often with a long body indicating strong momentum. The third candle continues in the direction of the move, opening and closing beyond the range of the first candle. The fair value gap itself is defined by the price range between the high of the first candle and the low of the third candle (in the case of a bullish move), or between the low of the first candle and the high of the third (in a bearish move). This range represents the area of imbalance or inefficiency.