What is a Fair Value Gap?
💡 Definition
A Fair Value Gap (FVG) is an imbalance or inefficiency in the market where price moves so quickly that it leaves a gap between the wicks of three consecutive candles. This represents an area where orders were not fully filled at fair value.
In Smart Money Concepts (SMC), institutions often return to these gaps to fill pending orders, making FVGs powerful zones for entries and targets.
Visual Representation
Bullish FVG Example
The gap (highlighted in gold) between candle 1's high and candle 3's low represents the FVG
Types of Fair Value Gaps
🟢 Bullish FVG
Forms during upward price movement. Gap exists between the high of candle 1 and low of candle 3. Price often retraces to fill this gap before continuing higher.
🔴 Bearish FVG
Forms during downward price movement. Gap exists between the low of candle 1 and high of candle 3. Price often rallies to fill this gap before continuing lower.
Trading Strategy
- Identification: Look for three consecutive candles where the middle candle creates a strong directional move
- Entry Zone: Wait for price to return to the FVG zone for optimal entry positions
- Confluence: Combine FVGs with other SMC concepts like Order Blocks, Liquidity Zones, and Market Structure
- Higher Timeframes: FVGs on daily/weekly charts are more significant and reliable
- Not All Gaps Fill: Some FVGs remain unfilled during strong trending moves
- Risk Management: Always use stop losses below/above the FVG zone
Why FVGs Matter
Smart Money (institutions) use FVGs as strategic zones to accumulate or distribute positions. When price returns to these imbalanced areas, it often provides:
✦ High probability entry points with favorable risk-reward ratios
✦ Clear invalidation levels for trade management
✦ Insight into where institutional orders may be waiting
✦ Potential reversal or continuation zones