Fair Value Gap (FVG)
A fair value gap is a price area where trading activity was thin because price moved quickly in one direction. The gap is interpreted as an imbalance between buy and sell interest, and some traders expect price to revisit that area later.
Structure of a fair value gap
A common definition uses a three candle pattern. In a bullish move, the low of the third candle is above the high of the first candle. The space between the first candle high and the third candle low is considered the gap. In a bearish move, the high of the third candle is below the low of the first candle.
Trading logic
The gap represents a zone where little trading occurred. When price returns to the zone, it may find resting liquidity and pause, reverse, or continue. Traders often mark the midpoint of the gap as a reference.
Entry and management
- Identify the gap after a strong directional impulse.
- Wait for price to retrace into the gap area.
- Use a trigger such as a reversal candle or a short term break.
- Place a stop beyond the gap.
- Target a prior swing or a continuation level.
Example
Price rallies in three strong candles, leaving a bullish gap between the first and third candles. Later in the session price pulls back into the gap and stalls. A trader buys on the reversal and targets a retest of the impulse high.
Cautions
Gaps are not guaranteed to fill. In strong trends the market may ignore the gap and continue. The definition of a gap varies across charting styles, so consistency matters.
Practical checklist
- Define the time horizon for Fair Value Gap (FVG) and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.
Common pitfalls
- Treating Fair Value Gap (FVG) as a standalone signal instead of context.
- Ignoring liquidity, spreads, and execution friction.
- Using a rule on a different timeframe than it was designed for.
- Overfitting a small sample of past examples.
- Assuming the same behavior in abnormal volatility.
Data and measurement
Good analysis starts with consistent data. For Fair Value Gap (FVG), confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.
Risk management notes
Risk control is essential when applying Fair Value Gap (FVG). Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.
Variations and related terms
Many traders use Fair Value Gap (FVG) alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.
Practical checklist
- Define the time horizon for Fair Value Gap (FVG) and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.
Common pitfalls
- Treating Fair Value Gap (FVG) as a standalone signal instead of context.
- Ignoring liquidity, spreads, and execution friction.
- Using a rule on a different timeframe than it was designed for.
- Overfitting a small sample of past examples.
- Assuming the same behavior in abnormal volatility.
Data and measurement
Good analysis starts with consistent data. For Fair Value Gap (FVG), confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.
Risk management notes
Risk control is essential when applying Fair Value Gap (FVG). Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.
Variations and related terms
Many traders use Fair Value Gap (FVG) alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.
Practical checklist
- Define the time horizon for Fair Value Gap (FVG) and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.