A fair value gap is a popular Smart Money Concepts idea that marks where price moved so fast it left an “imbalance” on the chart. Traders watch these zones because price sometimes returns to them later. If you have seen “FVG” on a chart and wondered what is a fair value gap in trading, this Daily Dunia guide explains what a fair value gap is in trading, how to spot one using three candles, and how traders use FVGs on their charts.
We will also cover how FVGs differ from order blocks and normal price gaps, and where they fall short.
What Is a Fair Value Gap in Trading?
A fair value gap is a price zone on a chart where price moved so quickly in one direction that little or no trading took place there, leaving a gap between the wicks of the first and third candles in a three-candle pattern.
That is the basic fair value gap meaning. The middle candle is large and strong, while the candles on either side do not overlap with each other. The empty space between them is the FVG.
A fair value gap is also called an imbalance or an inefficiency. The concept is widely used in Smart Money Concepts and the ICT trading strategy.
Why Do Fair Value Gaps Form?
Fair value gaps form when there is a strong imbalance between buyers and sellers, pushing price quickly in one direction.
This often happens after major news, economic data or large orders entering the market. Buyers or sellers become so dominant that price jumps past several levels without much two-way trading. This fast, one-sided move is sometimes called displacement.
So, what is an imbalance in trading? It is exactly this: a moment when one side overwhelms the other. Some traders believe price may later return to the gap to “rebalance” before continuing. This is a theory, not a rule, and price does not always come back.
How to Identify a Fair Value Gap
You can identify a fair value gap by looking at three candles in a row and checking whether the first and third candle wicks overlap. Here is how to identify fair value gaps step by step.
The Three-Candle Rule
Every FVG is built from three consecutive candles:
- Candle 1: the candle before the strong move.
- Candle 2: the large, strong candle that moves price quickly.
- Candle 3: the candle after the strong move.
If the wick of candle 1 and the wick of candle 3 do not overlap, the space between them is the fair value gap. Reading wicks correctly is essential here, so it helps to understand candlestick charts before looking for FVGs.
Bullish Fair Value Gap
A bullish fair value gap forms during a strong upward move. It is the gap between candle 1’s high and candle 3’s low.
Hypothetical example: candle 1 has a high of $100. Candle 2 is a large green candle that rises from $99.80 to $104.50. Candle 3 has a low of $102. Because $100 is below $102, the wicks do not overlap. The bullish FVG is the zone from $100 to $102.
Bearish Fair Value Gap
A bearish fair value gap forms during a strong downward move. It is the gap between candle 1’s low and candle 3’s high.
Hypothetical example: candle 1 has a low of $80. Candle 2 is a large red candle that falls from $80.20 to $76.80. Candle 3 has a high of $78. Because $78 is below $80, the wicks do not overlap. The bearish FVG is the zone from $78 to $80.
| Feature | Bullish FVG | Bearish FVG |
|---|---|---|
| Price Move | Strong move up | Strong move down |
| Gap Location | Between candle 1’s high and candle 3’s low | Between candle 1’s low and candle 3’s high |
| What Traders Expect | Possible support if price returns | Possible resistance if price returns |
| Possible Use | Looking for buying opportunities | Looking for selling opportunities |
How Traders Use Fair Value Gaps
Traders use fair value gaps as possible entry zones when price returns to them. A basic approach to FVG trading looks like this:
- Wait for the return: price coming back into the gap is often called “filling” or “mitigating” the FVG.
- Watch the 50% level: some traders focus on the middle of the gap. ICT traders call this level “consequent encroachment.”
- Look for confirmation: many traders wait for a rejection candle or a shift in market structure on a lower time frame before entering.
- Plan the stop and target: place the stop-loss beyond the gap and decide on a take-profit before entering.
Here is a hypothetical example of how to trade fair value gaps using the bullish FVG above. The 50% level is ($100 + $102) ÷ 2 = $101. Price returns to $101 and shows a rejection candle. You enter at $101 with a stop at $99.70, just below the gap, risking $1.30. A target of $103.60 gives $2.60 of reward, a 1:2 risk-reward ratio.
Fair Value Gap vs Order Block
The main difference is location. An order block is the last opposite candle before a strong move, while a fair value gap is the empty space left inside that move.
In the fair value gap vs order block comparison, the two often appear close together. Many SMC traders look for an order block with an FVG just above or below it, treating the overlap as a stronger zone.
| Feature | Fair Value Gap | Order Block |
|---|---|---|
| What It Is | A gap left by a fast move | The last opposite candle before a strong move |
| Number of Candles | Three-candle pattern | Usually one candle, sometimes a small group |
| Where It Appears | Inside the impulsive move | Just before the impulsive move |
| Main Idea | Price may return to rebalance | Unfilled institutional orders may remain |
Fair Value Gap vs Normal Price Gap
A fair value gap is different from a normal price gap. A normal price gap appears when the market opens at a very different price from the previous close, such as a stock opening higher after strong earnings, leaving an empty space between two candles.
An FVG forms within continuous trading. The candles touch one after another, but the strong middle candle moves so fast that candles 1 and 3 do not overlap.
Limitations of Fair Value Gaps
Fair value gaps are a trading concept used by some traders, not a proven or guaranteed method. Their main limitations include:
- Not every gap gets filled: price can move away and never return.
- Small time frames create noise: many FVGs on 1-minute or 5-minute charts appear and fail quickly.
- Choppy markets reduce reliability: in sideways conditions, gaps form and get ignored often.
- Identification can be subjective: traders disagree on which gaps matter and how to mark them.
Before using FVGs with real money, backtest them on historical charts and practice on a demo account.
Frequently Asked Questions
What is a fair value gap in simple words?
A fair value gap is an empty zone on a chart where price moved so fast that the first and third candles of a three-candle pattern do not overlap. It shows a strong imbalance between buyers and sellers.
Do fair value gaps always get filled?
No. Many traders ask, “Do fair value gaps get filled?” Price often returns to them, but many gaps are never filled. Treat them as possible zones, not certainties.
What time frame is best for FVGs?
Higher time frames, such as the 1-hour, 4-hour and daily charts, usually show more meaningful gaps. Many traders mark FVGs there and use lower time frames to refine entries.
What is the difference between an FVG and an order block?
An FVG is the gap left inside a fast move, formed by three candles. An order block is the last opposite candle just before that move.
Final Thoughts
So, what is a fair value gap in trading? It is a zone left behind by a fast, one-sided price move, marked by three candles whose outer wicks do not overlap. Some traders use FVGs to plan entries, but gaps do not always fill, and many fail on small time frames. Always combine them with confirmation, a clear stop-loss and solid risk management, and practice on a demo account first.
To keep learning Smart Money Concepts and price action in simple words, explore more beginner guides on Daily Dunia.
