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Introduction to Fair Value Gaps

What is a Fair Value Gap?

Imagine a highway during rush hour. Traffic usually moves in a predictable, back-and-forth flow. But if an emergency vehicle needs to get through, it creates a sudden, fast-moving lane, leaving a temporary void in its wake. In financial markets, something similar happens. These voids are called Fair Value Gaps, or FVGs.

Fair Value Gaps (FVGs) are three-candle formations that highlight moments of imbalance caused by sharp institutional moves.

An FVG is essentially a pocket of inefficiency in the market. It occurs when the price of an asset, like a stock or a currency, moves up or down very quickly, so fast that it doesn't trade at every price point along the way. This rapid move creates an imbalance between buyers and sellers, leaving a 'gap' on the price chart.

The Three-Candle Pattern

You can spot an FVG by looking for a specific three-candle sequence on a chart. It’s a simple visual pattern.

Here’s how to break down the pattern:

  1. Candle 1: The first candle.
  2. Candle 2: The middle candle. This one is typically large and shows the aggressive price move.
  3. Candle 3: The final candle in the sequence.

A bullish FVG (an upward imbalance) is formed when the top of Candle 1's wick and the bottom of Candle 3's wick do not overlap. The space between them is the gap.

A bearish FVG (a downward imbalance) is the opposite. It’s the space between the bottom of Candle 1's wick and the top of Candle 3's wick, which also do not overlap.

The key is that the middle candle is so long and moved so quickly that it left no overlap between the wicks of its neighbors.

Why FVGs Matter

So why should anyone care about these gaps? Because they act like magnets for price. The market tends to revisit these areas of inefficiency to 'fill the gap.' This means price will often retrace back into the FVG before continuing in its original direction.

Fair Value Gaps are price imbalances that institutions seek to fill before continuing price movement.

Think of it as the market wanting to balance its books. The fast move left some orders unfilled at those price levels. By returning to the gap, the market gives buyers and sellers another chance to trade at those prices, resolving the imbalance.

For traders, identifying an FVG can provide a clue about where the price might go next. It suggests a potential area where price could pull back, offering a point of interest for future market activity.

In short, FVGs are footprints left behind by big, fast moves. They show us where the market was inefficient, and these spots often become important levels to watch as the price story unfolds.