Fair Value Gap (FVG) Explained: The Complete Trading Guide for 2025

Key Takeaways

• Fair Value Gaps represent imbalances in the market where price makes a significant move, skipping price levels entirely
• FVGs come in two varieties: bullish (pointing up) and bearish (pointing down), each signaling different trading opportunities
• These gaps tend to act as magnets, with price often returning to “fill” them, creating high-probability trading setups
• FVGs are especially effective when combined with order blocks and other technical analysis tools
• Unlike conventional indicators, FVGs directly reflect actual market psychology and institutional money movements

Introduction

Fair Value Gaps represent one of the most powerful concepts in technical analysis, especially when you understand how they relate to larger market movements. These gaps are essentially “unfinished business” that the market tends to revisit.

Fair Value Gaps are a fundamental element of Smart Money Concept (SMC) and serve as a window into institutional trading behavior. As a key component of smart money analysis, FVGs reveal exactly where big players have moved the market so quickly that price discovery was interrupted. Mastering these smart money-driven gaps gives retail traders a rare glimpse into professional trading patterns and institutional order flow.

What is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) refers to a price range on a chart where buying and selling activity is unbalanced. This typically arises during a sharp price movement, resulting in a section with minimal or no trading.

Put simply, a fair value gap represents an area the market has skipped over—like a missing puzzle piece. Over time, the market often attempts to revisit and “fill” this gap, bringing the price back to that level.

Fair Value Gap Definition

Technically speaking, a Fair Value Gap is formed when the low of a candle is higher than the high of the next candle (for bearish FVGs) or when the high of a candle is lower than the low of the next candle (for bullish FVGs). It’s essentially a gap in the normal flow of price action.

But here’s what makes FVGs special: unlike random price movements, these gaps have a tendency to be “filled” as the market naturally seeks equilibrium. This makes them incredibly useful for traders looking for high-probability setups.

Bullish vs. Bearish Fair Value Gaps

Not all gaps are created equal. Understanding the difference between bullish and bearish FVGs is crucial for interpreting what the market might do next.

Bullish Fair Value Gap

• Forms when price moves rapidly upward
• Created when buyers suddenly overwhelm sellers
• Appears as an empty space between candles on a chart
• Often signals strong bullish momentum

A bullish FVG forms during an uptrend when the low of one candle is higher than the high of the candle that follows it. This creates an upward-facing gap that suggests buying pressure was so strong that price couldn’t follow its normal discovery process.

These bullish gaps often act as support areas if price retraces, making them excellent potential entry points for traders looking to join an uptrend.

Bearish Fair Value Gap

• Forms when price moves rapidly downward
• Created when sellers suddenly overwhelm buyers
• Also appears as an empty space between candles
• Often signals strong bearish momentum

Conversely, a bearish FVG appears during a downtrend when the high of one candle is lower than the low of the following candle. This downward-facing gap indicates that selling pressure was intense enough to skip price levels entirely.

Bearish FVGs frequently serve as resistance zones if price bounces back up, creating potential shorting opportunities for traders.

Here’s a simple comparison table to help you distinguish between them:

How to Identify Fair Value Gap

Spotting FVGs might seem tricky at first, but once you know what to look for, they practically jump off the chart. Here’s my step-by-step process:

1. Look for rapid price movements: FVGs typically form during quick, decisive moves in the market
2. Check for three consecutive candles: The middle candle is where the action happens
3. Compare the highs and lows: For bullish FVGs, check if the low of the first candle is higher than the high of the third candle
4. Mark the gap area: The space between these levels represents your FVG
5. Confirm with volume: Higher volume during the formation can indicate a stronger FVG signal

What I love about FVGs is that they’re not subjective like many other chart patterns. They either exist or they don’t—there’s no gray area.

The Three-Candle Pattern

The classic FVG forms with three consecutive candles:

1. The Setup Candle: The first candle that establishes the direction
2. The Momentum Candle: The second candle that creates the gap by opening beyond the first candle’s range
3. The Confirmation Candle: The third candle that confirms the gap by not returning to fill it immediately

Let me walk you through how I identify these:

For a Bullish FVG:

• The low of the third candle must be higher than the high of the first candle
• The empty space between them is your Fair Value Gap

For a Bearish FVG:

• The high of the third candle must be lower than the low of the first candle
• The empty space between them is your Fair Value Gap

Here’s a simplified example from one of my recent trading sessions:

In this example, the Fair Value Gap exists between 103 (the high of candle 1) and 108 (the low of candle 3).

What Makes a Fair Value Gap Valid?

Not all gaps are created equal. Here’s what I look for to validate an FVG before trading it:

Clean Formation

The gap should have a clean, clear structure with minimal price action inside the gap itself. Messy, overlapping candles often indicate choppy market conditions rather than a true Fair Value Gap.

Appropriate Size

Extremely small gaps may not be significant enough to act as strong magnets for price. Conversely, exceptionally large gaps might indicate news-driven moves that may not follow typical filling patterns.

Alignment with Market Structure

The most powerful FVGs align with existing market structure:

• Bullish FVGs that form at support levels
• Bearish FVGs that form at resistance levels
• Gaps that form at previous swing points

Time Consideration

Fresh FVGs (recently formed) tend to be more reliable than older ones. The longer a gap has existed without filling, the less likely it may be to fill in the near future.

How to Trade Fair Value Gaps

Now for the part you’ve been waiting for—how to actually profit from these market inefficiencies. Trading FVGs effectively requires understanding when they’re most likely to be filled and how to structure your trades around them.

The Mitigation Principle

The core concept behind trading FVGs is “mitigation” or “filling” of the gap. Markets have a natural tendency to revisit these skipped price levels, and this tendency creates trading opportunities.

I’ve found that about 70-80% of FVGs eventually get filled, though the timeframe can vary widely from minutes to months, depending on the market and circumstances.

Entry Strategies

Here are some proven ways to enter trades using FVGs:

1. Retracement Entry: Wait for price to return to the edge of the FVG and enter when it begins to penetrate the gap
2. Confirmation Entry: Wait for price to enter the FVG and show signs of continuing through it (like a specific candlestick pattern)
3. Aggressive Entry: Place limit orders within the FVG in anticipation of it being filled
4. FVG with Order Block: Combine FVGs with order blocks (areas of significant buying or selling) for higher-probability setups

Stop Loss Placement

One advantage of trading FVGs is that they provide clear levels for stop loss placement. Typically, you’d want to place your stop:

• For bullish FVGs: Just below the bottom of the gap
• For bearish FVGs: Just above the top of the gap

Taking Profits

As for profit targets, common approaches include:

• Targeting the complete filling of the gap
• Using previous support/resistance levels beyond the gap
• Employing a risk-reward ratio (like 1:2 or 1:3)
• Trailing stops to capture extended moves

The ICT Trading Strategy with FVGs

The ICT (Inner Circle Trader) methodology places heavy emphasis on Fair Value Gaps as key market structure components. This approach combines FVGs with:

• Order blocks (areas of significant buying or selling)
• Liquidity sweeps (when price moves to trigger stop losses)
• Smart money concepts (tracking institutional money flow)

When these elements align with an FVG, the probability of a successful trade increases dramatically. I’ve found this especially effective in the forex market.

Fair Value Gap in Forex Markets

Forex traders, you’re in luck! FVGs work exceptionally well in currency markets due to their liquidity and 24-hour nature.

The forex market’s continuous trading creates perfect conditions for FVGs to form, especially during transitions between trading sessions or during major news events when price can jump significantly.

Major currency pairs like EUR/USD, GBP/USD, and USD/JPY often display textbook FVG patterns, particularly at the daily and 4-hour timeframes. These higher timeframe FVGs tend to have greater significance and higher probability of being filled.

What makes forex FVGs special is how they often align with key institutional order levels, giving retail traders a glimpse into where the big money might be sitting.

Fair Value Gap Examples

Let’s look at some real-world examples to cement your understanding.

Example 1: Bullish FVG in an Uptrend

Imagine you’re watching Bitcoin during a strong uptrend. After a substantial move up, there’s a brief consolidation followed by another sharp move higher. Looking closely, you notice that the low of a green candle is significantly higher than the high of the red candle that follows it—creating a perfect bullish FVG.

Two days later, price retraces back to this gap and bounces precisely from the middle of the FVG zone, confirming its role as support and launching another leg up.

Example 2: Bearish FVG as Resistance

Consider a stock that’s been declining. During a particularly aggressive selling phase, you spot a bearish FVG where the high of one candle is well below the low of the next. This gap sits untouched for several weeks.

When the stock eventually stages a recovery, it rallies right up to the lower boundary of this bearish FVG and immediately gets rejected. Traders who recognized this pattern had a perfect opportunity to enter short positions with a clearly defined risk level.

Fair Value Gap and Order Blocks

If you really want to supercharge your FVG trading, combining them with order blocks is where the magic happens.

Order blocks are zones where significant buying or selling took place before a strong move. When an FVG forms near an order block, you’ve essentially identified an area where institutional orders are likely placed—and that’s powerful information.

Here’s why this combination works so well:

• Order blocks show where major players entered positions
• FVGs indicate where price is likely to return
• Together, they create a “double confirmation” setup

The best setups often feature an FVG that forms right after an order block, suggesting that institutional buying or selling was strong enough to create market inefficiency.

Fair Value Gap vs. Imbalance: What’s the Difference?

These terms are often used interchangeably, but there are subtle distinctions:

Fair Value Gap:

• Specifically refers to the unfilled space between candles
• Has a defined structure with specific candle patterns
• Usually forms during standard market hours

Imbalance:

• A broader concept covering any price inefficiency
• Includes gaps, but also other inefficient price movements
• Commonly used to describe overnight gaps or opening gaps

Think of it this way: all Fair Value Gaps represent imbalances, but not all imbalances qualify as Fair Value Gaps. This distinction helped me refine my trading approach to focus on the most high-probability setups.

Fair Value Gap Indicators

While FVGs can be spotted manually, several indicators have been developed to automate the process. These tools can save you time and help ensure you don’t miss potential setups.

Popular FVG Indicators

1. TrendSpider’s FVG Indicator: Automatically identifies and marks FVGs across multiple timeframes
2. FVG MTF Indicator: Shows fair value gaps across different timeframes simultaneously
3. Smart FVG: Includes filtering options to show only high-probability gaps

What’s the best indicator for fair value gaps? Honestly, the one that fits your trading style. Some traders prefer simple indicators that just mark the gaps, while others want comprehensive tools with filtering options and statistical data.

I personally prefer using a basic FVG indicator to identify the gaps and then applying my own analysis to determine which ones are most likely to be filled, rather than relying solely on an algorithm.

Combining EMAs with Fair Value Gaps

One powerful approach I’ve found particularly effective is combining Exponential Moving Averages (EMAs) with FVGs, especially on 5-minute charts for day trading. Here’s why this combination works so well:

The 5-minute timeframe provides enough detail to catch intraday FVGs without the noise of lower timeframes. When you overlay key EMAs—typically the 8, 21, and 50 EMAs—you create a complete trading framework:

1. EMA Direction as Trend Filter: The slope and arrangement of these EMAs help confirm whether an FVG is forming in the direction of the dominant trend
2. EMA Crossovers Near FVGs: When the 8 EMA crosses the 21 EMA near an FVG, it often signals that the gap is about to be tested
3. EMA Support/Resistance Confluence: FVGs that form near key EMA levels (particularly the 50 EMA) have a higher probability of being filled
4. 5-Minute Chart Sweet Spot: This timeframe is ideal because institutional algorithms often execute based on 5-minute data, creating cleaner FVGs that align with smart money movements

I’ve noticed that on 5-minute charts, when price creates an FVG and then the 8 EMA pulls back to the 21 EMA without violating the gap, it creates an extremely high-probability setup. The EMAs essentially act as “guardrails” that help confirm which FVGs are most likely to be respected by the market.

DIY Approach

If you prefer not to use indicators, a simple process is:

1. Scan charts manually for rapid price movements
2. Apply horizontal lines at the boundaries of potential gaps
3. Note these levels and watch for price to return to them

This manual approach has the advantage of making you more familiar with how FVGs form and behave, which can improve your intuitive understanding over time.

Creating a Fair Value Gap Trading Plan

After experimenting with countless approaches, I’ve developed this step-by-step plan for trading FVGs effectively:

Step 1: Scan for FVGs

I begin each session by scanning my watchlist for potential Fair Value Gaps across multiple timeframes, focusing primarily on the 4-hour and daily charts.

Step 2: Qualify the Setups

For each potential FVG, I ask:

• Does it align with the broader trend?
• Is it at a significant support/resistance level?
• Is there confirming evidence (volume, momentum, etc.)?

Step 3: Determine Entry Triggers

I don’t enter immediately after identifying an FVG. Instead, I wait for:

• A reversal candle pattern (engulfing, pin bar, etc.)
• A break of a minor trendline
• A retest of a key level

Step 4: Set Precise Targets and Stops

For each trade:

• Primary target: Complete gap fill
• Stop loss: Beyond the most recent swing point
• Risk-reward ratio: Minimum 1:2

Step 5: Monitor and Adjust

Unlike “set and forget” approaches, I actively monitor FVG trades because:

• Some gaps fill partially before reversing
• Market context can change rapidly
• Adjusting stops to breakeven after partial fills improves overall results

This structured approach has significantly improved my consistency with FVG trading.

What is Fair Value Gap in Trading? The Psychological Perspective

Beyond the technical definition, understanding the psychology behind FVGs can give you an edge.

Fair value gaps essentially represent imbalances between buyers and sellers that were so significant that price couldn’t move through normal increments. This happens when:

• Large players (institutions) enter or exit positions rapidly
• Unexpected news creates sudden sentiment shifts
• Technical breakouts trigger cascades of orders

These gaps reveal where the market’s natural price discovery process broke down, showing us points of exceptional imbalance. And markets, like nature, tend to restore balance over time.

I’ve noticed that traders who understand this psychological aspect tend to have more patience waiting for gaps to be filled, rather than abandoning their thesis too early.

Common Mistakes When Trading Fair Value Gaps

I’ve made my share of mistakes with FVGs, and I’ve seen others make the same ones. Let me save you some painful lessons:

Mistake #1: Assuming All Gaps Must Fill

While the majority of FVGs (around 70-80%) eventually fill, not all do. Some gaps remain unfilled for long periods, especially if they form during significant market regime changes. I’ve learned to respect when a gap resists filling after multiple attempts—it’s telling you something important about market structure.

Mistake #2: Ignoring Market Context

A Fair Value Gap by itself isn’t enough reason to enter a trade. You need supporting context:

• What’s the overall trend?
• Are you at a key support or resistance level?
• What’s the broader market sentiment?

One of my most expensive lessons was taking an FVG trade against a strong trend—that gap never filled, and I paid the price for ignoring the bigger picture.

Mistake #3: Poor Risk Management

Even high-probability setups like FVGs require proper risk management. I always determine:

• My maximum acceptable loss before entering
• The ideal risk-to-reward ratio (I typically aim for at least 1:2)
• Whether the trade aligns with my overall trading plan

Remember, even the best FVG trades can still fail. Never risk more than you can afford to lose on a single setup.

FAQs About Fair Value Gaps

What is the difference between a fair value gap and a regular gap?

Regular gaps form between trading sessions (like overnight gaps in stocks) when no trading occurs. Fair value gaps, however, form during active trading when price moves so rapidly that certain levels are skipped. Unlike regular gaps that appear between trading days, FVGs can form at any time during continuous trading.

How reliable are fair value gaps as trading signals?

In my experience, approximately 70-80% of fair value gaps eventually get filled. However, there’s no guaranteed timeframe for this to happen—some fill within hours, others may take months. The reliability increases when FVGs align with other technical factors like support/resistance levels, key moving averages, or order blocks.

Do fair value gaps work on all timeframes?

Yes, FVGs can form on any timeframe from 1-minute charts to monthly charts. However, the higher the timeframe, the more significant the gap tends to be. Weekly and daily FVGs generally have a higher probability of being filled and often attract more attention from institutional traders.

Can fair value gaps fail to fill?

Absolutely. No trading method is 100% reliable, and FVGs are no exception. Gaps sometimes fail to be completely filled, especially if market structure dramatically changes or if stronger opposing pressure emerges. This is why proper stop loss placement is crucial when trading based on FVGs.

How can I incorporate fair value gaps into my existing trading strategy?

Start by using FVGs as additional confirmation for your current setups. For example:

• If you’re a trend trader, look for FVGs that form in the direction of the trend and use them as potential entry points during retracements
• If you trade support and resistance, pay special attention when these levels align with FVGs
• For breakout traders, FVGs can help identify potential reversal points if the breakout fails

Is FVG an imbalance?

Yes, a Fair Value Gap is a type of imbalance. All FVGs represent imbalances in the market, but not all imbalances are Fair Value Gaps. FVGs have a specific structure defined by the three-candle pattern, while the term “imbalance” can refer to various price inefficiencies, including but not limited to FVGs.

Are fair value gaps liquidity?

Fair Value Gaps themselves aren’t liquidity, but they often represent areas where liquidity was absent (which created the gap). Importantly, these areas frequently become magnets for future liquidity as the market attempts to fill the void. Institutional traders sometimes use these gaps as areas to place orders, creating liquidity where it was previously lacking.

Conclusion

Fair value gaps offer a unique window into market inefficiencies and institutional activity. By understanding how to identify and trade these powerful chart patterns, you’re gaining insight into market psychology that many retail traders miss.

Remember, the most effective FVG trading combines technical analysis with patience. Not every gap will fill immediately, and not every filled gap will result in a major reversal. Like all trading strategies, success comes from consistent application, proper risk management, and continual refinement of your approach.

I encourage you to start identifying FVGs on your charts today. Begin by marking them without trading, observe how price interacts with these areas, and gradually incorporate them into your trading plan as your confidence grows.