What is a Fair Value Gap (FVG)? A Simple Explanation

Spend any time around modern price-action trading and you'll hear the term Fair Value Gap, or FVG. It sounds complicated. It isn't. Here's what it is and how I use it every day.

What is a Fair Value Gap?

A Fair Value Gap is a three-candle pattern. It marks an imbalance, a spot on the chart where price moved so fast in one direction that it left a gap. Barely any trading happened in that zone.

Think of it like this. When big money shoves price hard one way, buyers and sellers don't get to trade fairly in that area. That skipped zone is the gap. Price often comes back to it later to fill in the business it missed, then carries on.

How to spot one on a chart

Find a strong move and look at three candles in a row. The gap sits between two things:

• the wick of the first candle, and
• the wick of the third candle.

If there's clean space between those two wicks, an area the big middle candle blew straight through, that's your FVG. Bigger and cleaner usually means more significant.

Bullish vs bearish gaps

• Bullish FVG. Forms on a strong move up. Price often dips back into it later, and the gap can act as support to launch the next leg higher.
• Bearish FVG. Forms on a strong move down. Price often rallies back into it, and the gap can act as resistance before the next drop.

So the gap works like a magnet first, then a springboard. Price comes back to it, and if the story still holds, it keeps going the original way.

How to trade one properly

Spotting a gap is the easy bit. Trading it well is where people go wrong. My rules:

1. 1Wait for the return. Don't chase the move that made the gap. Let price come back into it.
2. 2Go with the trend. A gap in the direction the market's already heading beats one you're using to fight the trend. Every time.
3. 3Aim at liquidity. I want price heading toward an obvious high or low it's likely reaching for. The gap is the entry. The liquidity is the target.
4. 4Know where you're wrong. Stop goes on the far side of the gap. If price fills it and keeps going, you were wrong. Take the small loss and move on.

How this fits my strategy

My strategy, FVG0.5DoL, is built on this. Quick version: I look for a Fair Value Gap, I'm interested in the 0.5, the midpoint of the gap and usually the cleanest entry, and I want price drawing toward a DoL, a Draw on Liquidity. Gap for the entry, midpoint for the precision, liquidity for the target. It's a rule-based continuation strategy I backtested over four years of data, and I trade it on NQ in the New York session.

Common mistakes

• Trading every gap. Not every imbalance is worth it. Trend and liquidity are everything.
• Ignoring the trend. Using a gap to justify fighting a strong move loses fast.
• No target. A great entry with no idea where you're going isn't a trade. It's a hope.

Get this one idea down and a lot of the 'smart money' stuff suddenly clicks.