Fair value gaps explained

Fair value gaps explained

A fair value gap (FVG) is a three-candle pattern where price moves so aggressively in one direction that it leaves behind an area of price that was never actually traded through properly — a literal gap in the order flow. This area often acts as a magnet, with price returning to "fill" the gap before continuing in the original direction.

The exact structure of a bullish FVG

A bullish FVG forms across three consecutive candles:

• Candle 1 — the initial candle establishing the baseline high wick
• Candle 2 — a strong, large bullish candle that moves up aggressively
• Candle 3 — the next candle, whose low stays above Candle 1's high (it can be bullish or bearish)

The FVG zone is the gap between Candle 1's high and Candle 3's low. This is the price range that Candle 2 moved through so fast that no real two-sided trading occurred there — it's essentially a region of missing price discovery.

The exact structure of a bearish FVG

The mirror image: Candle 1 is the initial candle establishing the baseline low wick, Candle 2 is a large bearish candle, and Candle 3's high is lower than Candle 1's low. The gap between Candle 1's low and Candle 3's high is the bearish FVG.

An FVG is not just any gap on a chart. It must be formed by three specific candles where the middle candle moves so aggressively that it leaves untouched price between the first and third candle's extremes.

Why price returns to fill FVGs

Markets are driven by orders — buy and sell orders matching against each other. When price moves through a zone so fast that proper order matching couldn't occur, there's often residual unfilled order interest still resting in that zone. When price returns, those orders get filled, which is why FVGs frequently act as support (bullish FVG) or resistance (bearish FVG) on the first retest.

How to trade an FVG

The most common approach: after a strong impulsive move that creates an FVG, wait for price to pull back into the FVG zone, look for a confirmation signal (rejection wick, bullish/bearish engulfing candle) within the zone, and enter in the direction of the original impulse with a stop below the FVG zone (for bullish) or above it (for bearish).

FVG vs supply and demand zones

An FVG is more specific than a general supply/demand zone — it requires the precise three-candle structure. Not every supply/demand zone has an FVG, and not every FVG aligns perfectly with a supply/demand zone, though they often overlap. When both coincide at the same price level, that area carries significantly more weight.

Important nuance: partial vs full fills

Price does not always fill an FVG completely. Sometimes it enters the zone and reacts strongly before filling the entire gap. Many traders treat the FVG as a reaction zone to watch rather than a guaranteed full-fill target — especially on lower timeframes where partial fills are common.

A key algorithmic level to watch within any FVG is its exact 50% midpoint, known as the Consequent Encroachment (CE). Price will frequently pull back exactly halfway into the FVG to find its balance before aggressively reversing, making the 50% line a prime location to look for lower-timeframe confirmation candles.

• A bullish FVG is the gap between Candle 1's high and Candle 3's low in a three-candle sequence where Candle 2 is a large bullish move — Candle 1 can be bullish or bearish
• The gap represents a region of missing price discovery — price moved through it so fast that real two-sided order matching did not occur
• FVGs frequently act as support/resistance on the first retest because unfilled orders still rest in that zone
• When an FVG aligns with a supply/demand zone at the same price level, that area carries significantly more combined weight
• An FVG is unmitigated (active) if price has not yet returned to touch it; once price retests the zone, it is mitigated and loses strength for future trades