Fair Value Gaps and Price Imbalances
Fair value gaps are price areas where the market moved so fast that no two-sided trading occurred. Price often returns to these imbalances before continuing in the original direction.
What Is a Fair Value Gap?
A Fair Value Gap (FVG) — also called an imbalance or inefficiency — occurs when price moves so rapidly in one direction that the normal two-sided auction process fails to occur in a price range. In candlestick terms: a three-candle sequence where the wick of candle 1 and the wick of candle 3 do not overlap — leaving a price gap between them that was only traded in one direction.
Identifying FVGs on a Chart
On a candlestick chart, look for three consecutive candles where a strong middle candle is present:
- The high of candle 1 is lower than the low of candle 3 (bullish FVG) — the bullish impulse was so strong that there is a gap between the first candle's high and the third candle's low
- The low of candle 1 is higher than the high of candle 3 (bearish FVG) — the bearish impulse left a gap on the upside
The FVG zone is the range between candle 1's high and candle 3's low (bullish) or candle 1's low and candle 3's high (bearish).
Why Price Fills FVGs
Markets tend toward efficiency — the two-sided auction process seeks to ensure all price levels are traded from both sides. A FVG represents an area of price inefficiency. Market participants who were unable to execute orders during the fast move often place pending orders within the FVG, creating order concentration that attracts price back to the zone.
How to Trade FVGs
FVGs are not automatic reversal zones — they are potential reaction zones within the context of the overall trend. The professional approach:
- Identify the FVG in the direction of the higher-timeframe trend
- Wait for price to retrace into the FVG zone
- Look for bullish price action confirmation within the FVG (for bullish FVGs)
- Enter in the direction of the original impulse with a stop below the FVG (for bullish)
- Target the high of the impulse that created the FVG
FVG + Order Block Confluence
When a FVG and an order block overlap in the same price zone — meaning an OB was left at the same level where an imbalance occurred — the resulting confluence zone has the highest probability of causing a significant reaction. This combined zone is sometimes called a "breaker block" or "mitigation zone" and represents one of the highest-quality entry points in the SMC framework.
Fair value gaps are the market's unfinished business. Price returns to complete the two-sided auction — and that return creates the entry opportunity.