Definition of Fair Value Gap (FVG)

Fair Value Gap (FVG) is a price zone where the market moved too fast, creating an imbalance between supply and demand. On a candlestick chart, FVG appears when three consecutive candles have the second candle's body completely non-overlapping with the first and third candles. Specifically, candle 1 and candle 3 have wicks or bodies that create a gap that candle 2 does not fill.

How to Identify FVG

To identify FVG, look for a three-candle pattern:

Candle 1: strong bullish/bearish candle.

Candle 2: small candle (often doji or small body) offset to one side relative to candle 1.

Candle 3: candle continuing the trend in the same direction as candle 1, creating a gap between the bodies of candle 1 and candle 3.

Example: In an uptrend, candle 1 is a bullish marubozu, candle 2 is a small doji, candle 3 is a bullish engulfing. The gap between the low of candle 1 and the high of candle 3 is the FVG.

How to Trade FVG

Strategy 1: FVG Continuation

When FVG forms in a trend, wait for price to retrace and partially fill the FVG (usually 50% or fully) then enter in the trend direction.

Stop loss below the low of FVG (for bullish FVG) or above the high of FVG (for bearish FVG).

Take profit at the next liquidity zone or Fibonacci extension level.

Strategy 2: FVG as Support/Resistance

FVG often acts as dynamic support/resistance. When price retests the FVG and shows a clear reaction (pin bar, engulfing), traders can enter a counter-trend trade for a short-term move.

Real Example

On EUR/USD H1 chart: After a strong rally, three candles form a bullish FVG. Price then retraces to the FVG zone (around 1.1050-1.1060) and bounces up. Trader enters Buy at 1.1055, SL below FVG low at 1.1045, TP at previous high 1.1100. Trade wins.

Common Mistakes

Confusing FVG with a standard gap: FVG is not an opening price gap, but a gap between candle bodies.

Entering too early: Not waiting for price to retest the FVG, leading to stop loss being hit.

Ignoring market context: FVG in a sideways market is often less effective.

Conclusion

FVG is a powerful tool in SMC, helping traders identify imbalanced price zones and find precise entry points. Practice identifying it across multiple timeframes to increase accuracy.

Content is for reference only, not investment advice. Forex trading carries high risk.

Fair Value Gap (FVG) – The Imbalance Zone