In trading, a Fair Value Gap (FVG) is a price imbalance created when the market moves strongly in one direction, leaving a range of prices where relatively little trading occurred.
It is commonly used in price-action / Smart Money Concepts (SMC) trading to identify areas where traders expect price may later retrace before continuing its move.
1. The basic idea
An FVG is usually identified using three candles.
For a bullish FVG:
Candle 1 Candle 2 Candle 3
│ │ │
│ │ │
├── High │ │
│ │ ├── High
│ │ │
│ BIG MOVE UP │
│ │ │
├── Low │ ├── Low
│
│
The important relationship is:
Candle 3's low > Candle 1's high
The area between Candle 1's high and Candle 3's low is considered the bullish FVG.
Example:
Candle 1 high = 100
Candle 2 makes a strong bullish move
Candle 3 low = 105
Then:
Bullish FVG = 100–105
Traders may watch this 100–105 area if price later comes back into it.
2. Bearish FVG
The opposite occurs during a strong downward move.
For a bearish FVG:
Candle 3's high < Candle 1's low
Example:
Candle 1 low = 200
Candle 2 makes a strong bearish move
Candle 3 high = 195
Therefore:
Bearish FVG = 195–200
If price later rises back into this zone, some traders watch it as a potential resistance area.
3. Why does an FVG appear?
Imagine price is trading around $100.
Suddenly, aggressive buying enters the market:
100 → 102 → 105 → 108
The movement is so fast that the candles surrounding the impulse may leave an area between their wicks that was not meaningfully traded during that three-candle formation.
SMC traders interpret this as an imbalance between buying and selling pressure.
The important point is:
An FVG isn't literally an empty space where no trades occurred.
It's better understood as a price imbalance / inefficient price movement, based on the three-candle structure.
4. Three-candle structure
This is the most important thing to understand.
Bullish FVG
Let:
Candle 1 = first candle
Candle 2 = displacement candle
Candle 3 = third candle
Condition:
High of Candle 1 < Low of Candle 3
Candle 2
│
│
│
│
C1 High ───┤ ┌── C3
│ │
│ │
│ │
└───────┘
FVG
The gap is:
C1 High → C3 Low
Bearish FVG
Condition:
Low of Candle 1 > High of Candle 3
C1
│
│
├── Low
│
│ FVG
│
└────────────
│
│
│ C3 High
│
The gap is:
C3 High → C1 Low
5. What does "FVG fill" mean?
Suppose you have a bullish FVG:
100–105
Later price comes down:
110
│
│
105 ───── FVG top
│
103 ───── Price enters FVG
│
100 ───── FVG bottom
│
95
Price entering the FVG is called mitigation by many traders.
If price reaches 100, traders may call the FVG fully filled.
However, there is an important misconception:
FVG does NOT have to fill.
A common trading mistake is:
"Every FVG must eventually be filled."
That's not a reliable rule.
An FVG can remain partially or completely unfilled while price continues in the original direction.
6. Consequent Encroachment (CE)
A concept frequently used with FVGs is Consequent Encroachment, or CE.
It is simply the 50% midpoint of the FVG.
Suppose:
Bullish FVG = 100–110
Then:
CE = (100 + 110) / 2 = 105
So:
FVG bottom = 100
CE = 105
FVG top = 110
Some traders watch the 50% level as an important reaction area.
But again, it isn't guaranteed to hold.
7. FVG vs normal gap
These are not exactly the same thing.
Traditional gap
A traditional market gap can occur when one trading session opens substantially above or below the previous session.
For example:
Yesterday close = 100
Today open = 110
That's a conventional gap.
FVG
An FVG is normally identified inside a three-candle price structure, even when the market trades continuously.
So:
Traditional gap ≠ FVG
8. What is "displacement"?
This is extremely important.
A high-quality FVG usually occurs alongside strong displacement.
Displacement means price moves aggressively away from an area.
For example:
Small candles
│
│
▼
█
█
█████
███████
█████████
↑
displacement
Characteristics can include:
Large-bodied candle
Strong directional movement
Relatively small opposing wicks
Break of a previous swing
Increased volatility
A tiny three-candle gap with no meaningful price movement is generally less significant than an FVG created by a strong impulse.
9. FVG and Market Structure
Many traders don't use an FVG by itself.
They combine it with market structure.
For example:
Higher High
/\
/ \
/ \
/ \
HH / \
/ \
/ \
└─ Higher Low
If price breaks an important previous high with strong displacement and creates a bullish FVG, a trader may pay more attention to the resulting FVG.
The reasoning is:
Structure break + displacement + FVG
rather than simply:
"I see a gap, therefore I buy."
10. FVG and liquidity
Another common SMC concept is liquidity.
Simplified example:
Buy-side liquidity
↑
─────────────────
previous high
/\
/ \
/ \
/
/
↓
sell-side liquidity
A trader might look for a sequence such as:
Price approaches liquidity.
Liquidity is taken/swept.
Price makes strong displacement.
Displacement creates an FVG.
Price retraces into the FVG.
Trader looks for confirmation.
This is sometimes called a liquidity sweep → displacement → FVG setup.
But these are trading concepts, not guarantees about future price movement.
11. FVG as an entry area
A simplified bullish example:
Suppose BTC is moving upward.
You identify:
Previous resistance = $60,000
Price breaks above it strongly
Strong bullish candle creates an FVG
FVG = $60,200–$60,500
Price then retraces:
$61,500 ↑
│
$61,000 │
│
$60,500 ──────┤ FVG top
$60,350 │ ← retracement
$60,200 ──────┤ FVG bottom
│
$59,800 ↓
A trader might watch the FVG for a reaction.
But the FVG itself isn't an entry signal.
A more disciplined approach is to wait for additional evidence, such as:
Rejection from the zone
Change in short-term structure
Strong reversal candle
Volume confirmation
Alignment with higher-timeframe structure
12. Bullish FVG example
Imagine these candle values:
| Candle | High | Low |
|---|---|---|
| 1 | 100 | 95 |
| 2 | 115 | 99 |
| 3 | 120 | 105 |
Because:
Candle 3 Low (105) > Candle 1 High (100)
we have:
Bullish FVG = 100–105
CE:
(100 + 105) / 2 = 102.5
So the important levels are:
Top: 105
CE: 102.5
Bottom: 100
13. Bearish FVG example
| Candle | High | Low |
|---|---|---|
| 1 | 120 | 110 |
| 2 | 105 | 95 |
| 3 | 100 | 90 |
Because:
Candle 3 High (100) < Candle 1 Low (110)
we have:
Bearish FVG = 100–110
CE:
105
So:
Bottom = 100
CE = 105
Top = 110
14. Inversion FVG (IFVG)
An Inversion Fair Value Gap is a related concept.
Imagine a bullish FVG:
100–105
Initially, traders may expect it to act as support.
But price comes down strongly and breaks through the FVG.
Later price rallies back into that same area.
Some SMC traders then interpret the old bullish FVG as potentially acting as resistance.
Conceptually:
Initially:
105 ───────── FVG
SUPPORT
100 ─────────
After breakdown:
105 ───────── old FVG
RESISTANCE
100 ─────────
↑
retest
This is commonly called an IFVG.
15. Higher-timeframe vs lower-timeframe FVG
This matters a lot.
An FVG on:
1-minute chart
5-minute chart
15-minute chart
1-hour chart
4-hour chart
Daily chart
doesn't necessarily have the same significance.
For example:
Higher timeframe
Daily FVG:
Large institutional-scale movement
↓
Daily FVG
↓
Potentially watched over a larger
price/time range
Lower timeframe
1-minute FVG:
Short-term price movement
↓
1m FVG
↓
Much more market noise
A common framework is:
Higher timeframe → directional context
Lower timeframe → entry refinement
16. Common FVG mistakes
Mistake 1: Treating every gap as important
Not every three-candle imbalance is meaningful.
Look at the surrounding market structure and displacement.
Mistake 2: Assuming every FVG gets filled
False.
Some FVGs are never fully revisited.
Mistake 3: Blindly entering when price touches the FVG
Touching an FVG doesn't guarantee a reversal.
Price can go straight through it.
Mistake 4: Ignoring higher timeframe
A bullish 1-minute FVG doesn't automatically mean the overall market is bullish.
Mistake 5: Using FVG alone
FVG is generally more useful when combined with context.
For example:
Market structure + liquidity + displacement + FVG + confirmation
is a more complete framework than simply marking every gap.
17. A simple FVG trading framework
You can think about it as a five-step process:
Step 1 — Determine higher-timeframe direction
Look at something like:
4H → 1H
Ask:
Is the market generally making higher highs/higher lows or lower highs/lower lows?
Step 2 — Identify important liquidity
Look around:
Previous highs
Previous lows
Equal highs
Equal lows
Session highs/lows
Step 3 — Look for displacement
After liquidity is taken, look for a strong directional move.
Step 4 — Mark the FVG
Identify the three-candle imbalance created by that displacement.
Step 5 — Wait for retracement and confirmation
Instead of automatically entering when price touches the FVG, watch how price behaves inside the zone.
18. The most important distinction
A useful mental model is:
FVG = location, not prediction.
An FVG tells you:
"This area was created during an imbalance and may be worth watching."
It does not tell you:
"Price will definitely reverse here."
That's the key difference between identifying a technical structure and having a complete trading strategy.
