Fair Value Gap (FVG): A Complete Guide for Traders (2025)

What Is a Fair Value Gap (FVG)?

A fair value gap is a price gap that occurs when there's a noticeable difference between the closing price of one trading period and the opening price of the next.

Essentially, they show moments when the market hasn't had enough time to digest information, leading to abrupt price changes. Understanding the meaning of the fair value gap can be crucial for making informed trading decisions.

If combined with breaker blocks, fair value gaps can offer even deeper insight into institutional activity and potential price reversals.

How to Identify a Fair Value Gap (FVG) on a Chart

Here’s how  how to identify fair value gap on a chart:

Let's say that the gap occurs due to a significant upward price movement.

• Initial Price Movement: First, you'll see a sharp rise in the closing price of the initial trading period.

• Gap: If the opening price of the next period is higher than the closing price of the previous period, the chart shows a blank space between the two prices.

• Next Trading Period (Continuation or Correction):

  • Continuation: After the gap, the price may continue in the direction of the gap, indicating strong momentum.

  • Correction: Alternatively, the price may retrace to fill the gap, moving back towards the closing price of the previous period.

What are the Types of Fair Value Gap (FVG)?

Fair value gaps can be categorized based on their direction and market context.

Bearish Fair Value Gaps

A bearish Fair Value Gap indicator occurs when there is a gap between the lowest point of the wick on the first candlestick and the highest point of the wick on the third candlestick.

This gap typically forms within the body of the middle candlestick pattern.

What is crucial is that a gap has formed within the middle candlestick due to the lack of connection between the wicks of the first and third candlesticks, indicating potential downward pressure.

Bearish fair value gaps are caused by factors such as negative economic news, disappointing earnings reports, or sudden shifts in market sentiment toward pessimism.

How to Spot a Bearish FVG

• Look for three consecutive candlesticks.

• Identify the lowest wick of the first candlestick.

• Identify the highest wick of the third candlestick.

• If there is no overlap between these two wicks and the gap lies within the body of the second candle, a bearish FVG may be present.

Confirm with volume or additional bearish signals for higher accuracy.
 

Bullish Fair Value Gaps

A bullish Fair Value Gap indicator forms when there is a gap between the highest point of the wick on the first candlestick and the lowest point of the wick on the third candlestick.

Similar to the bearish FVG, the exact direction of each candlestick is not the main focus. What matters most is the presence of a gap within the middle candlestick where the wicks of the first and third candlesticks do not meet.

This gap signifies potential upward momentum and buying opportunities.

Bullish fair value gaps are typically triggered by positive economic news, better-than-expected earnings reports, or a sudden shift in investor sentiment towards optimism.

How to Spot a Bullish FVG

• Observe three consecutive candlesticks.

• Identify the highest wick of the first candlestick.

• Identify the lowest wick of the third candlestick.

• If the two wicks do not touch and the middle candle’s body contains the gap, this may indicate a bullish FVG.

• Look for confirmation such as rising volume or bullish indicators before entering a trade.

How to Use Fair Value Gap (FVG) in Technical Analysis

Fair value gaps play a crucial role in technical analysis by highlighting market inefficiencies and providing traders with actionable insights. Identifying fair value gaps helps traders anticipate price movements.

For example, a bullish gap up might retrace to fill the gap before continuing upward, while a bearish gap down might briefly recover to fill the gap before resuming its decline.

These gaps indicate potential entry and exit points for traders.

Fair value gaps also confirm trend strength. In an uptrend, bullish gaps suggest continued upward momentum, while in a downtrend, bearish gaps indicate sustained downward pressure.

How to Trade Fair Value Gap (FVG)

Trading fair value gaps effectively requires understanding the market context, setting proper risk management rules, and recognizing when a gap is likely to be filled.

Traders often wait for price retracements into the gap to open positions.

• For bullish gaps, this can mean waiting for a price dip after a gap-up to enter a long position.

• For bearish gaps, traders may look for price retracements upward into the gap before initiating a short position.

Indicators like volume, trend strength, and candlestick patterns can help confirm trade setups.

Fair Value Gap (FVG) Entry & Exit Techniques

Fair Value Gaps offer strategic entry and exit opportunities based on the principle that price tends to revisit inefficient zones before continuing in the original direction. Traders can leverage these gaps to structure high-probability setups when combined with proper confirmation tools and risk management.

Entry Techniques

Retracement Entry into the FVG

• Buy Setup (Bullish FVG): Enter long when price retraces into a bullish FVG zone (typically below current price).

• Sell Setup (Bearish FVG): Enter short when price revisits a bearish FVG zone (typically above current price).

• Works best when aligned with higher timeframe trend direction.

Partial Fill Entry

• Enter when price partially fills the FVG (e.g., touches 50% of the gap zone), signaling early demand/supply reaction.

• Ideal for traders seeking better risk-to-reward positioning.

Confirmation-Based Entry

• Wait for additional signals before entering (e.g., bullish engulfing candle for long, bearish engulfing for short).

• Volume spikes, RSI divergence, or market structure shifts can strengthen the signal.
   

Exit Techniques

Take Profit at Structure Levels

• Exit near recent swing highs/lows, support/resistance, or Fibonacci levels depending on trade direction.

• Avoid holding through strong opposing zones.

Partial Exit within the Gap

• Scale out of the position once price reaches a key point inside the FVG zone.

• For example, close 50% of the position at midpoint of the gap, and trail the rest.

Full Exit on Opposite Market Reaction

• If price aggressively rejects the FVG zone (e.g., long wick or high volume reversal), consider exiting fully.

• This signals the inefficiency may not get fully filled or respected.
   

Stop-Loss Placement

• Conservative Approach: Place stop-loss just beyond the FVG boundary (below gap for longs, above for shorts).

• Aggressive Approach: Tight stop just inside the gap to reduce risk, though this increases chances of premature exit.

How to Trade Fair Value Gap (FVG) in Different Timeframes?

When it comes to fair value gap trading, choosing the right timeframe is crucial. Fair value gaps can appear on any chart, whether you're trading stocks, forex, or cryptocurrencies. However, different timeframes can provide different insights into how the market reacts to these gaps.

Short-Term Timeframes (Intraday Trading)

For traders who focus on short-term moves, such as day traders and scalpers, using smaller timeframes like 1-minute, 5-minute, or 15-minute charts can help spot fair value gaps that may fill quickly.

These gaps are often caused by sudden news or market volatility.

Benefits of short-term trading fair value gaps:

• Quick trading opportunities based on gap fills.

• Smaller stop-loss levels for better risk management.

• Frequent trading opportunities throughout the day.

However, short-term gaps can sometimes be less reliable due to market noise and unpredictable price action. That's why traders often use a fair value gap indicator to confirm potential trade setups.

Medium-Term Timeframes (Swing Trading)

If you're a swing trader looking for trades that last a few days to weeks, medium-term timeframes like the 1-hour or 4-hour charts are ideal.

Fair value gaps on these charts tend to reflect stronger market movements, offering better trade reliability.

Why medium-term timeframes are useful for fair value gap trading:

• Gaps are more meaningful and easier to analyze.

• Market conditions have more time to stabilize.

• Provides a balance between frequent opportunities and reliable setups.

Traders often use technical tools like moving averages and momentum indicators alongside fair value gap indicators to strengthen their trading decisions.

Long-Term Timeframes (Position Trading)

For long-term traders or investors, fair value gaps on daily, weekly, or monthly charts can provide insights into larger market trends. These gaps usually occur due to significant economic events or major shifts in market sentiment.

Advantages of long-term fair value gap analysis:

• Provides a clear picture of market direction.

• Helps identify key support and resistance zones.

• Suitable for traders who prefer lower trade frequency and higher accuracy.

While fair value gaps on higher timeframes take longer to fill, they often align with strong trends, making them valuable for strategic trading decisions.

How to Choose the Right Timeframe for Fair Value Gap (FVG)

The best timeframe for fair value gap trading depends on your trading style, risk tolerance, and market conditions.

Day traders may prefer shorter timeframes for quick entries, while swing traders and investors might focus on longer timeframes for more reliable setups.

Regardless of the timeframe you choose, using a fair value gap indicator can help you accurately identify gaps and improve your overall trading strategy.

Fair Value Gap (FVG) Detection Tools & Indicators

Identifying Fair Value Gaps manually can be time-consuming, especially in fast-moving markets. Fortunately, traders can rely on specialized tools and indicators to detect these inefficiencies more efficiently and accurately. Below are common methods used to identify FVGs on price charts:

FVG Indicators on Trading Platforms

Many platforms like TradingView, MetaTrader 4/5, offer custom indicators or community-built scripts specifically designed to highlight Fair Value Gaps. These tools automatically mark zones where a gap between the first and third candlestick wicks exists, often shading the FVG zone for visual clarity.

Smart Money Concept Indicators

Indicators based on Smart Money Concepts (SMC) often include FVG detection as part of broader tools. These indicators typically combine order blocks, liquidity zones, and FVGs to provide a full institutional-level view of market structure. They are especially useful in ICT-based strategies.

Manual Chart Analysis

For traders preferring manual detection:

• Look for three-candle formations.

• Mark the zone between the first candle’s wick (high or low) and the third candle’s wick (opposite wick).

• The gap should be entirely within the body of the middle candle and not touched by wicks on either side.
   

Volume Profile + Price Action Tools

By combining volume profile indicators with FVG detection, traders can validate whether a gap zone coincides with low-volume areas, enhancing confidence in potential retracement zones.

Algorithmic and AI-Based Tools

Advanced trading software, including algorithmic models or machine learning tools, can be programmed to identify FVGs based on user-defined rules, providing automated alerts for potential setups.

What Causes a Fair Value Gap (FVG) in Trading?

Several factors can cause a fair value gap, including:

Economic News and Announcements

Major economic events, such as interest rate decisions, employment reports, and GDP releases, can cause significant market movements.

When these announcements occur outside of regular market hours, they can lead to a fair value gap as the market reacts to the new information once trading resumes.

Earnings Reports

Corporate earnings reports can also trigger fair value gap trading.

Positive or negative earnings surprises often lead to sharp price movements when the market opens, creating a gap between the previous closing price and the new opening price.

Market Sentiment

Sudden shifts in market sentiment, driven by geopolitical events, natural disasters, or changes in investor confidence, can cause rapid price movements that result in fair value gaps.

These events can lead to panic buying or selling, creating gaps as the market adjusts to the new sentiment.

Supply and Demand Imbalances

Significant imbalances between supply and demand can cause fair value gaps.

For example, a large institutional order placed outside of regular trading hours can create a gap as the market opens and prices adjust to reflect the new supply or demand levels.

Fair Value Gap vs. Order Blocks, Imbalances, and Price Gaps

While all four concepts relate to inefficiencies or institutional activity in price movement, each reflects a unique type of market behavior with different trading implications.

Fair Value Gap vs. Order Block

A fair value gap and an order block serve different functions in trading, but both provide key insights into market movements.

A fair value gap represents a price gap between the closing price of one period and the opening price of the next, indicating a temporary market inefficiency.

On the other hand, an order block refers to a price zone where large institutional orders, such as those placed by banks or hedge funds, have been executed.

These zones often act as significant support and resistance levels, as the price tends to react strongly when revisiting them.

While fair value gap trading focuses on gaps that may get filled, order block trading revolves around key price zones where large players have entered the market, offering high-probability trading opportunities based on those levels.

Fair Value Gaps vs. Imbalances

While both fair value gaps (FVGs) and market imbalances highlight inefficiencies in the market, they differ in how they appear and impact price action.

A market imbalance occurs when there is a significant difference between buying and selling pressure, often leading to one-sided price movement.

Unlike FVGs, imbalances do not always leave visible gaps on the chart but can still indicate areas where price may revisit to rebalance supply and demand.

Key differences between fair value gaps and imbalances:

• Visibility: FVGs are visible gaps on the chart, while imbalances may appear as extended price movements.

• Cause: Imbalances are often driven by large institutional orders, whereas FVGs result from rapid price movement with little trading in between.

• Trading Approach: Traders use FVGs to anticipate price retracements, while imbalances help identify areas where market participants may step in to restore equilibrium.

Using a fair value gap indicator can help traders spot potential trading opportunities, but understanding market imbalances alongside FVGs provides a more complete view of price action.

Fair Value Gap vs. Liquidity Voids

In institutional and smart money trading strategies, both Fair Value Gaps (FVGs) and Liquidity Voids are key concepts used to identify inefficiencies in price movement. While they often appear similar on the chart, they serve different analytical purposes and reflect distinct market dynamics.

Both FVGs and liquidity voids represent imbalances in price caused by aggressive buying or selling. They are typically seen as areas the market may return to in order to "rebalance" supply and demand.

Traders use both concepts to identify potential retracement zones, entry points, or areas where institutions may re-enter the market.

Fair Value Gaps vs. Other Price Gaps

Understanding the differences between fair value gaps and other types of price gaps is crucial.

Fair Value Gaps vs. Common Gaps

Fair Value Gaps typically indicate potential areas where the market will retrace to fill the gap, reflecting underlying market inefficiencies.

Whereas Common Gaps often occur in non-trending markets and are usually filled quickly without significant trading opportunities.

Fair Value Gaps vs. Breakaway Gaps

Fair Value Gaps occur during regular trading and suggest a potential retracement to fill the gap. On the other hand, Breakaway Gaps happen at the beginning of a new trend, often due to a breakout from a consolidation pattern, and are less likely to be filled immediately.

Fair Value Gaps vs. Exhaustion Gaps

Fair Value Gaps indicate a temporary market inefficiency that will likely be corrected.

However, Exhaustion Gaps occur near the end of a significant price move, signaling a potential reversal or the end of the current trend.

Fair Value Gaps vs. Inverse Fair Value Gaps

Fair Value Gaps represent bullish or bearish imbalances in price action where the market is expected to retrace and "fill" the inefficiency.

In contrast, Inverse Fair Value Gaps (also known as inefficient price expansions in the opposite direction) occur when price returns into a previously balanced or filled area, breaking through a fair value region without hesitation. This often signals strong momentum or a change in market sentiment, and unlike standard FVGs, they may not get filled, as the imbalance has already been corrected or reversed.

Algorithmic Trading and Fair Value Gaps

Algorithmic trading, also known as algo trading, uses automated systems to identify and execute trades based on predefined criteria, such as price gaps, volume, and technical forex indicators.

Trading algorithms are programmed to scan large amounts of market data in real-time to detect fair value gaps across different timeframes. These algorithms use a variety of techniques to spot gaps, including:

• Pattern Recognition: Identifying gap formations based on price action and historical data.

• Fair Value Gap Indicators: Specialized indicators highlight gaps on charts, making it easier for algorithms to act upon them.

• Volume Analysis: Algorithms analyze trading volume to confirm whether a gap is likely to be filled or continue in the trend direction.

• Momentum Tracking: Monitoring price momentum to determine if a fair value gap presents a trading opportunity.

By using these methods, algorithmic trading systems can identify fair value gaps more efficiently than manual analysis, allowing for quicker decision-making.

What Are the Risks in Fair Value Gap (FVG) Trading?

New traders often misunderstand or misuse the fair value gap trading strategies. Here are the common mistakes to avoid:

• Assuming all gaps will be filled: Not every gap will be retraced, and relying solely on gap fills can lead to significant losses if the price moves further away from the gap.

• Ignoring the broader market context: Failing to consider factors such as major news events or economic data releases that may cause the gap can result in poor trading decisions.

• Entering trades too early: Traders often enter positions before confirming that the gap will be filled, which can lead to premature stop-outs or losses.

• Over-leveraging positions: Overestimating the likelihood of a gap being filled without proper risk management can result in larger-than-expected losses.

Advantages and Limitations of Using Fair Value Gap (FVG)

Fair Value gaps have several advantages as well as limitations:

Advantages

• Improved Market Timing: Fair value gaps help traders identify optimal entry and exit points.

• Enhanced Decision-Making: Provides clear signals based on market inefficiencies.

• Potential for Higher Profits: Effective use of fair value gaps can lead to profitable trading opportunities.

Limitations

• Potential for False Signals: Not all gaps will be filled, leading to possible false signals.

• Market Conditions: The reliability of fair value gaps can vary depending on market conditions.

• Risk Management: Requires careful risk management to avoid significant losses.

Conclusion

Fair value gaps offer a simple but powerful way to understand what’s happening behind the scenes in the market. They show areas where the price moved too quickly, leaving unfinished business behind. By learning how to spot these gaps and knowing what they might mean, traders can better time their entries, exits, and overall strategies.

Like any tool, they’re not perfect, but when used with other forms of analysis and careful planning, fair value gaps can help you make more thoughtful and informed trading decisions.