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What Is the Fair Value Gap?

A Fair Value Gap (FVG) is an area on the chart where price moved too quickly in one direction.

Because the movement was fast, there was not enough balanced trading between buyers and sellers, creating a gap-like area of imbalance.

In simple terms, an FVG represents a price range where the market failed to trade efficiently.

The Basic Structure of an FVG

This structure is remarkably simple and mechanical, requiring no technical indicators to identify. It is entirely defined by the relationship between three consecutive candles on a chart.

The "Three-Candle Rule" Definition

To identify an FVG, look for a large, impulsive candle that shows a sudden burst of institutional volume.

This large, aggressive move is always Candle 2 (the center candle).

Bullish FVG Structure

This forms during a sharp price increase.

Candle 1: The candle right before the massive upward move. Look at its High (the top of the upper wick).

Candle 2: The large, aggressive bullish (green/white) candle.

Candle 3: The candle right after the move. Look at its Low (the bottom of the lower wick).

Source: TradingView

Bearish FVG Structure (Sell Imbalance)

This forms during a sharp price drop.

Candle 1: The candle right before the massive downward move. Look at its Low (the bottom of the lower wick).

Candle 2: The large, aggressive bearish (red/black) candle.

Candle 3: The candle right after the move. Look at its High (the top of the upper wick).

Source: TradingView

How to Draw the FVG Zone Accurately

To use an FVG as an entry zone or profit target, you plot a rectangular box on your chart using these precise reference points:

1. The Upper Boundary: Drawn from the wick tip of Candle 1 (in a bearish FVG) or Candle 3 (in a bullish FVG).

2. The Lower Boundary: Drawn from the wick tip of Candle 1 (in a bullish FVG) or Candle 3 (in a bearish FVG).

3. The Execution: Extend the box from these two lines to the right into future price action.

The 3 Critical Levels Within an FVG Structure

Inside every FVG box, there are three key price levels that algorithmically react when the price mitigates (returns to) the gap:

1. The Open (The Edge)

The very first level price touches. In an extremely strong trend, price will often just tap this outer edge and aggressively reject back in the trend direction.

2. Consequential Encroachment (The 50% Level)

The exact midpoint of the FVG zone. If price enters the FVG but the candle bodies fail to close past the CE line, it confirms a high-probability institutional reaction.

3. The Invalidation Level / Close

The far end of the FVG box (the wick of Candle 3). If a candle body closes past this final line, the FVG is fully filled and invalidated.

How to Use FVGs for Entries

When trading a Fair Value Gap (FVG), you can choose between two primary entry methods depending on your risk tolerance:

1. Risk Entry (Direct Limit Orders): Covered in this section

2. Confirmation Entry (Lower Timeframe Shifts): Covered in the next section

Risk Entry (Limit Orders / Direct Setups)

This method involves placing a Limit Order directly inside the FVG identified on your higher timeframe (HTF, such as 1H or 4H).

This is highly effective when the market trend is aggressive and the price is unlikely to retrace deeper into an Order Block (OB).

Entry Execution

You can position your limit order (Buy Limit / Sell Limit) at one of three critical levels inside the FVG box:

• The Edge (Open): Best used in hyper-aggressive, fast-moving trends. You will rarely miss the move, but it requires a wider stop-loss and higher risk of drawdown.

• The 50% Level (CE): The most recommended limit level in SMC. Represents the algorithmic fair value equilibrium where institutions love to refuel.

• The Deep Fill (OB Confluence): Used when a valid Order Block sits directly behind the FVG. Gives you the tightest possible stop-loss and the maximum risk-to-reward, but you risk missing the trade if price rejects early.

Stop Loss Placement

Place your stop loss just outside the invalidation level of the FVG (the wick of Candle 1) or just past the structural Order Block that generated the move.

Do not place it right inside the gap, as deep mitigations can easily wick you out.

Confirmation Entry (Lower Timeframe Execution)

This method requires patience. You wait for the price to tap your HTF FVG, then drop down to a lower timeframe (LTF, like the 5m or 1m) to confirm that the Smart Money is genuinely reversing the market.

Follow the 4-Step Execution Process:

1. Identify a high-probability FVG on your Higher Timeframe (1H or 4H) that was created alongside a clear BOS.

2. Wait for the live price to pull back into the HTF FVG (or its 50% CE line). The moment price taps the zone, switch down to your LTF chart (5m or 1m).

3. On the LTF chart, wait for the short-term counter-trend to be broken by an aggressive CHoCH. This confirms that institutional players are actively stepping back into the market.

4. The aggressive LTF CHoCH will leave behind a new, tiny LTF FVG or Order Block. Place your entry right there as the price does a quick micro-pullback.

Lesson 3: Conclusion

In this lesson, you mastered the mechanics of Fair Value Gaps (FVGs) and how to weaponize them in your trading:

• FVGs are areas of market imbalance created by rapid, one-sided price movements.

• They serve three major purposes: Entry Zones, Reaction Areas, or Profit Targets.

• A high-probability FVG must always be supported by market structure, liquidity sweeps, displacement, and HTF context.

In the next lesson, you will learn about Market Structure, which helps traders understand the overall direction of the market through swings, breaks, and shifts in trend.