What is a Fair Value Gap?

The Basics

A Fair Value Gap (FVG) is a three-candle pattern that forms when price moves fast enough in one direction that it leaves an imbalance behind — a gap between the wick of the first candle and the wick of the third candle, with the middle candle showing strong directional momentum. That gap represents a zone where trading was thin or one-sided: far more orders were filled on one side of the market than the other.

In practice, an FVG on a bullish move sits between the high of candle one and the low of candle three; on a bearish move, it's the mirror image. The bigger and cleaner the middle candle's displacement, the more significant the imbalance tends to be.

Why It Forms

Markets move in bursts when large participants — institutions, market makers, algorithmic flow — need to fill significant size quickly. That urgency pushes price through levels without the usual two-sided trading, leaving inefficiency behind. Traders who follow Smart Money Concepts view that inefficiency as a magnet: price often returns to "rebalance" the gap before continuing in its original direction, since not all the resting orders in that zone were filled the first time through.

How Traders Use It

An FVG on its own isn't a signal — it's context. Most disciplined approaches combine it with the broader structure: is the gap forming during a liquidity sweep, at a premium or discount zone relative to the recent range, and aligned with higher-timeframe direction? An FVG that lines up with several of these factors carries far more weight than one appearing in isolation.

This is also why FVGs alone aren't a complete strategy. They're one piece of a larger liquidity-and-structure framework — see our Core Framework section for how order blocks, structure shifts, and premium/discount zones fit around this same idea.

A Word of Caution

Like any single concept, treating FVGs as a standalone signal is a common beginner mistake — plenty of gaps never get revisited, and plenty that do still continue against the position. Risk management and confluence with the wider market structure matter far more than any one pattern. Nothing here should be taken as a signal to enter a trade; it's a description of a concept, not trading advice.