What is a Fair Value Gap?
A Fair Value Gap (FVG) is a concept used in price action and “smart money” trading theories. It refers to an imbalance in price — a section on a candlestick chart where one side of the market dominated so strongly that price moved quickly, leaving little to no trading activity in between.
What It Is
A Fair Value Gap forms when there is a three-candle pattern that shows an imbalance. Specifically:
- The low of Candle 2 is higher than the high of Candle 1 — this forms a bullish FVG.
- The high of Candle 2 is lower than the low of Candle 1 — this forms a bearish FVG.
This means price skipped over that price zone — no fair two-way trade occurred there.
In essence, it is an inefficient move in the market. The theory suggests that markets tend to revisit these areas later to rebalance liquidity and fill in that inefficiency.
How Traders Use It
Traders often mark these gaps to:
- Identify potential retracement zones where price might return before resuming trend direction.
- Spot areas of liquidity, since institutions may fill orders in these gaps.
- Combine them with other tools — such as market structure, volume, or order blocks — for confluence.
For example, if price rallies sharply and leaves a bullish fair value gap behind, some traders expect price to later dip into that gap before continuing higher.
Why It Matters
Fair Value Gaps help traders visualize where the market moved too quickly — areas where there may still be unfinished business. They serve as a clue to where liquidity hunts or price rebalancing might occur.
They are not guarantees of reversal or continuation — they are simply context for understanding how price seeks balance.
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