Understanding Fair Value Gaps (FVG) in Technical Analysis

In the world of trading, price action reveals valuable clues about the psychology of market participants. One concept that has gained popularity, especially among institutional and smart money traders, is the Fair Value Gap (FVG). It’s a tool that can help traders identify potential imbalances in price and future areas of interest.

What is a Fair Value Gap (FVG)?

A Fair Value Gap is a price imbalance or inefficiency created on a chart when the market moves aggressively in one direction — typically due to high momentum or a strong reaction to news. This movement often “skips over” price levels without allowing buyers and sellers to transact fairly at those prices.

This gap usually forms over a 3-candle formation and is based on the Smart Money Concept (SMC), which focuses on institutional trading behavior.

How to Identify a Fair Value Gap

To spot an FVG:

1. Look at a 3-candle sequence on any timeframe (commonly used on 1H or 4H).
2. An FVG occurs when the wick of the first candle and the wick of the third candle do not overlap — leaving a “gap” between them that the second candle shoots through.
3. This gap represents an area where the market didn’t “trade fairly,” meaning not all orders were filled.

Example: Bullish FVG

• Candle 1: Bearish with a lower wick
• Candle 2: Strong bullish candle with a big body
• Candle 3: Bullish with a small upper wick
  If the high of Candle 1 is below the low of Candle 3, this creates a bullish FVG.

This gap is a potential support zone where price might return to before continuing upward.

Why FVGs Matter

• Price tends to return to FVG zones to fill in the inefficiency before continuing the trend.
• These areas are often used by institutions to enter or scale into positions.
• FVGs help traders identify high-probability entry zones with minimal risk.

How to Use FVGs in Your Strategy

1. Mark the FVG zones using horizontal rectangles.
2. Wait for price to return to the zone.
3. Look for confirmation, such as:
   • Bullish or bearish engulfing patterns
   • Break of structure
   • Volume increase
4. Enter trades near the FVG with a stop-loss just beyond the gap and targets based on market structure or liquidity levels.

Combining FVG with Other Tools

FVGs are powerful alone, but combining them with:

• Support/Resistance zones
• Order blocks
• Liquidity levels
• Trend analysis

…can significantly boost your trading accuracy.

Final Thoughts

Fair Value Gaps offer a unique way to see how and where institutional traders might be acting. By identifying these imbalances and understanding how price tends to react around them, you can improve your edge in the markets.

Like any tool, FVGs are most powerful when used with discipline, risk management, and a clear strategy.