In financial markets, price usually moves in an orderly way, with a steady back-and-forth between buyers and sellers. Sometimes, however, price moves so quickly in one direction that it leaves a gap, creating an imbalance. This is known as a Fair Value Gap, or FVG.

An FVG is a specific three-candle pattern. It occurs when the candle in the middle is so large and moves so fast that its wicks don't overlap with the wicks of the candles on either side of it. This visual gap on the chart highlights the price inefficiency.

Fair Value Gaps are typically caused by a sudden surge of buying or selling pressure. This can happen in response to major economic news, a company's earnings report, or large orders placed by institutional investors like banks or hedge funds.

When a wave of one-sided orders hits the market, price moves aggressively. The speed of the move leaves behind a trail of unfilled orders, creating the imbalance we see as an FVG. In essence, the market didn't have enough time to facilitate trades at those 'skipped' price levels.

So why do these gaps matter? In technical analysis, FVGs act like magnets. The market has a natural tendency to revisit inefficient areas to 'fill the gap.' This means price will often retrace back to the FVG to process the orders that were missed during the initial rapid move.

This retracement allows the market to rebalance itself. For traders, identifying an FVG can signal a potential area where price might pull back before continuing in its original direction. A bullish FVG (created by a strong move up) might act as a future support level, while a bearish FVG (from a strong move down) could become a resistance level.

Now, let's test your understanding of these market imbalances.

Understanding these core concepts is the first step to seeing the market in a new light.