Learning how to trade fair value gaps (FVG) involves identifying a specific 3-candle imbalance where the price moved too quickly. This price action leaves a “Fair Value Gap” (FVG). The core trading strategy is to wait for the price to retrace into this FVG, using that zone (especially the 50% level) as a high-probability entry to rejoin the original trend.
This guide details the step-by-step rules for identifying and trading Fair Value Gaps (FVGs). It shows traders where to set their entry, stop-loss, and take-profit, and how to filter out bad signals by combining FVGs with market structure.
Key Takeaways
- A Fair Value Gap (FVG) is a 3-candle pattern that signals a price imbalance or inefficiency.
- FVGs act as “magnets,” attracting price back to “fill” the gap (a core Smart Money Concept).
- The main strategy is to wait for the price to retrace into the FVG and use it as a high-probability entry.
- Crucial: An FVG is only a high-probability signal when it aligns with the current trend.
- A complete FVG trade requires clear Entry (e.g., 50% fill), Stop-Loss, and good risk management rules.
1. What Is a Fair Value Gap (FVG)?
A Fair Value Gap (FVG) is a specific three-candle pattern that highlights a price imbalance between buyers and sellers on a chart. It occurs when the price moves very quickly and aggressively in one direction, leaving a “gap” or inefficiency in the market.
You can visually identify this imbalance by looking at the wicks of the three candles. A gap is formed when the wick of the first candle and the wick of the third candle do not overlap. The empty space left between them is the Fair Value Gap.
A related concept is the inverse fair value gap (IFVG). An IFVG occurs when price respects a previous FVG but then breaks aggressively through it, turning the old gap into a new point of resistance or support.
As a core part of Smart Money Concepts (SMC) and price action trading, traders view FVG as a “magnet” or a retracement zone. The theory is that the market will often return to this area to “fill” the imbalance (re-balance liquidity) before continuing in its original, dominant direction.
2. What Is the Structure of a Fair Value Gap?
The structure of an FVG is always identified using a three-candle formation. It’s the specific alignment of these three candles that reveals the imbalance.
2.1. The Three-Candle Formation
A Fair Value Gap is formed by the price action of three consecutive candles:
- Candle 1: A strong candle (the “impulse candle”).
- Candle 2: A second candle that continues the strong move, creating the gap.
- Candle 3: A third candle that confirms the gap.
The gap itself is the space between the high of Candle 1 and the low of Candle 3 (in a bullish FVG) or the low of Candle 1 and the high of Candle 3 (in a bearish FVG).
2.2. A Simple Example
Imagine a strong uptrend. The price suddenly shoots up aggressively, creating an imbalance zone (the FVG). The core concept is that the market will often pull back, or retrace, to “fill” a portion of that Fair Value Gap before continuing its upward trend. This fill zone is what traders watch for a potential entry.
2.3. Bullish vs. Bearish Fair Value Gaps
FVGs are categorized as bullish or bearish, indicating the direction of the imbalance and the potential trade.
- Bullish FVG (A Buy Zone): This bullish gap is created by a strong move upward. It leaves a gap that traders watch as a potential retracement zone to buy. The market often dips back down to “fill” this imbalance before continuing higher.
- Bearish FVG (A Sell Zone): This bearish gap is created by a strong move downward. It leaves a gap that traders watch as a potential retracement zone to sell. The market often rallies back up to “fill” this imbalance before continuing lower.
3. Why Do Fair Value Gaps Matter?
Fair Value Gaps are a critical concept because they highlight areas of inefficiency (or market inefficiencies) left behind by institutional (“Smart Money”) trading. They act as a roadmap, showing where the price is likely to revisit. This creates unique trading opportunities.
Traders use FVGs to:
- Identify “liquidity vods”: Fair Value Gap represents a “void” or “vacuum” in liquidity. The market is inefficient in this zone, and it has a high probability of pulling back to re-balance this area.
- Track institutional orders: The theory is that the rapid move that created the FVG left unfilled institutional orders behind. Price is drawn back to this zone to allow those large orders to be filled before the main trend continues.
- Find high-probability entries: Instead of chasing a fast-moving price, traders can patiently wait for the price to retrace into the FVG. This often provides a much safer, lower-risk entry point.
- Determine take-profit targets: If you are in a trade heading toward an old FVG, that gap can act as a magnet. The “gap fill” area often serves as a logical place to take profits.
- Establish confluence: Fair Value Gap becomes an even stronger signal when it lines up with other technical tools. An FVG that forms inside a major demand zone or right next to forex order blocks is considered a very high-probability setup.
4. How Do You Identify Fair Value Gaps on a Chart?
Identifying a Fair Value Gap is a visual, four-step process. It involves finding the pattern on a higher timeframe, spotting the imbalance, drawing the zone correctly, and then waiting for the price to return to that zone.
4.1. Step 1: Switch to a Higher Timeframe (HTF)
Fair Value Gaps can appear on any timeframe, but the most significant and reliable gaps are found on higher timeframes (HTFs). Traders typically focus on the 1-Hour (H1), 4-Hour (H4), and Daily (D1) charts to identify the main institutional zones.
4.2. Step 2: Look for a Strong Imbalance
Look for a powerful, fast move on the chart. This “impulse” price action is usually represented by long-bodied candles that show aggressive buying or selling. This is the “imbalance” you are trying to find, as it signals that price moved too quickly, leaving an inefficiency.
4.3. Step 3: Draw the Fair Value Gap Zone
Once you spot the three-candle pattern, you draw the FVG zone:
- For a Bullish FVG (an up-move): Draw the zone from the high of Candle 1 to the low of Candle 3.
- For a Bearish FVG (a down-move): Draw the zone from the low of Candle 1 to the high of Candle 3.
4.4. Step 4: Wait for Price to Return
Identifying the gap is only half the battle. The setup isn’t complete until the price retraces and returns to this zone. Many traders are particularly interested in the 50% level (or “Equilibrium”) of the Fair Value Gap, as it is often a key area for a potential entry.
5. How to Trade Fair Value Gaps? (A Step-by-Step Guide)
Trading Fair Value Gaps involves identifying the main trend and finding a Fair Value Gap that moves with that trend. This trading strategy requires waiting for a retracement into the FVG, and then setting a clear entry, stop-loss order, and take-profit. Here are 5 steps that instruct you on how to trade Fair Value Gaps effectively.
5.1. Step 1: Determine the Market Structure
This is the most critical filter. The Fair Value Gap is only a high-probability signal if it respects the current trend. Before looking for a gap, you must first identify the main Higher Timeframe (HTF) trend. Is the market bullish (making higher highs and lows) or bearish (lower lows and highs)?
5.2. Step 2: Find an FVG That Aligns With the Trend
Once the trend is identified, you filter the signals. If the HTF market structure is bullish, you only look for Bullish FVGs. These gaps act as “buy zones” or discount areas during a pullback. Conversely, if the trend is bearish, you only look for Bearish FVGs to use as premium “sell zones.”
5.3. Step 3: Wait for Confirmation
Do not trade blindly just because the price touches the Fair Value Gap. The highest-probability entries require confirmation that the retracement is over. This can be:
- A Candlestick Pattern: Look for a pin bar or engulfing candle to form within the FVG.
- Lower Timeframe Shift: Advanced traders wait for a Market Structure Shift (MSS) or Change of Character (CHoCH) on a lower timeframe.
- Confluence: The signal is strongest if the FVG overlaps with another key area, like order blocks, or forms just after a liquidity sweep.
5.4. Step 4: Set Entry, Stop Loss, and Take Profit
A professional trade requires pre-defined exits, both for a loss and a win.
- Entry: You can enter as soon as the price taps the Fair Value Gap or wait for a deeper fill to the 50% “Equilibrium” level. Alternatively, enter after your confirmation signal (like the close of an engulfing candle).
- Stop-Loss: The stop-loss is placed at the logical invalidation point. For a bullish, set it just below the FVG’s low. For a bearish, set it just above the FVG’s high.
- Take-Profit: The logical target is the next pool of liquidity. This is typically the next major swing high or low, or another significant, unfilled Fair Value Gap.
5.5. Step 5: Manage the Active Trade
Once the trade is active and moving in your favor, you can manage your risk. Good risk management is key. A common technique is to move your stop-loss order to your entry price (break-even) once the trade has moved significantly in your favor. Many traders also scale out (take partial profits) at key structure levels on the way to the final take-profit target.
6. How to Combine Fair Value Gap with Other Smart Money Tools
A Fair Value Gap is a powerful tool, but it should never be used in isolation. The highest-probability trades occur when an FVG forms in “confluence” with other Smart Money Concepts. These confirmation signals help filter out weak signals and identify where institutional interest is truly stacked.
| Combination | Signal Type | How It Helps |
| FVG + Order Blocks | Location | Confirms the FVG is in a valid demand/supply zone. |
| FVG + Liquidity Sweep | The Setup | Uses a “stop hunt” to fuel the move into the FVG. |
| FVG + Breaker Block | Confirmation | Confirms the trend is likely to continue after the FVG fill. |
6.1. Fair Value Gap + Order Block
An order block (OB) is a large concentration of institutional orders, often creating a strong demand zone (if bullish) or supply zone. When a Fair Value Gap forms directly adjacent to or inside an order block, it signals an extremely high-priority zone. This confluence shows that both inefficiency (the FVG) and heavy orders (the OB) are present at the same price, making it a very reliable entry point for a retracement.
6.2. Fair Value Gap + Liquidity Sweep
This is a classic “smart money” setup. It involves price first sweeping liquidity (running the stops) below an old low or above an old high. Immediately after this stop hunt, the price reverses aggressively, creating an FVG. Traders then wait for the price to pull back to that FVG, knowing the market has already “fueled up” for the real move.
6.3. Fair Value Gap + Breaker Block
A breaker block is a failed order block that the price has sliced through. You can use this to confirm the trend after a Fair Value Gap is filled. For example, in an uptrend, the price fills a bullish FVG, rallies, and then breaks through the next bearish resistance block. An inverse fair value gap can also serve this confirmation role.
7. What Does an Example Bullish FVG Trade on EUR/USD Look Like?
This example shows how all the concepts: Trend, Liquidity, and Fair Value Gap work together for a high-probability setup.
| Component | Setup Detail |
| Instrument | EUR/USD |
| Analysis (HTF) | The H4 (4-hour) chart is in a clear uptrend (making higher highs). |
| The Setup | Price pulls back, sweeps liquidity below a recent low, then reverses, creating a Bullish FVG on the H1 chart. |
| Confluence | The RSI shows a bullish divergence as price retraces, signaling weakening sell momentum. |
| Entry | A buy-limit order is placed at the 50% “Equilibrium” level of the H1 Fair Value Gap. |
| Stop-Loss (SL) | Placed just below the low of the Fair Value Gap zone (the 3-candle pattern). |
| Take-Profit (TP) | Set at the nearest major swing high, targeting a 1:2 or 1:3 Risk/Reward (R:R) ratio. |
This setup is considered high-probability because it combines all three key elements: it follows the trend (HTF structure), uses a liquidity sweep as “fuel,” enters at a confirmed imbalance zone (the FVG), and uses proper risk management.
8. What Are the Most Common Mistakes When Trading FVGs?
The most common mistakes traders make when using Fair Value Gaps (FVG) fall into two categories: failing to confirm the context and executing prematurely. This includes trading against the main trend, entering the gap without confirmation, and identifying the FVG pattern incorrectly from the start.
- Trading counter-trend FVGs: A Fair Value Gap that forms against the primary Higher Timeframe (HTF) market structure is a low-probability signal and is more likely to fail or “run through.”
- Entering without confirmation: Traders often see price touch the FVG and enter immediately. This price action is a common trap and can lead to catching a “fake move” where the price simply slices through the zone. Waiting for a confirmation signal (like trading patterns) is a crucial filter.
- Forgetting confluence: An FVG by itself is just one piece of the puzzle. A signal becomes much weaker if it is not supported by other factors. Forgetting to check for confluence in trading (like one of the order blocks, a liquidity sweep, or breaker) is a common error. A standalone FVG is a weak trading strategy.
- Drawing the FVG zone incorrectly: A simple technical error is misidentifying the gap. A Fair Value Gap must be a clean three-candle pattern where the wicks of candle 1 and candle 3 do not touch. If they overlap, it is not a valid FVG.
9. What Are Some Tips to Trade FVGs More Effectively?
To trade Fair Value Gaps more effectively, you must filter your signals based on premium/discount zones and the Higher Timeframe (HTF) structure. Furthermore, it is critical to account for volatility and avoid low-timeframe noise.
- Prioritize FVGs in premium/discount zones: This is a powerful filter. Use the Fibonacci retracement tool. In an uptrend, only look for bullish Fair Value Gaps that form below the 50% level (the “discount” zone). This trading strategy filters for the highest probability moves.
- Align with HTF structure: This is the golden rule. A bullish Fair Value Gap on the H1 chart is only a high-probability signal if the H4 and Daily market structure is also bullish. Never trade a Fair Value Gap that goes against the main trend.
- Use alerts: Instead of staring at the chart, set alerts on your trading platform (like TradingView). Place an alert at the start of the Fair Value Gap so you are notified when the price returns to the zone, saving you time and preventing impatience.
- Avoid low timeframes (below M5): Timeframes like the M1 or M5 are filled with many small Fair Value Gaps and “market noise”. Focus on the clean, clear FVGs on higher timeframes (M15 and above), as these are more likely to represent institutional order flow.
10. What Tools and Indicators Can Detect Fair Value Gaps?
While you can identify Fair Value Gaps manually, many traders use automated indicators to spot them quickly. These tools range from simple plotters on TradingView to advanced “Smart Money” toolkits for MT4/MT5 and liquidity heatmaps.
- TradingView FVG indicators: Many community-built indicators on TradingView can automatically find and draw Fair Value Gap zones on your chart. Popular search terms include “ICT FVG Auto Plotter” or “FVG Indicator,” which save time and help confirm the zones you find manually.
- Smart Money Concepts toolkits (for MT4/MT5): For the MetaTrader platforms, traders often use custom-coded “Smart Money Concepts” indicators. These all-in-one toolkits frequently include Fair Value Gap detection along with order blocks, breaker blocks, and other elements of the SMC trading strategy.
- Liquidity heatmaps: While not a direct FVG finder, advanced tools like liquidity heatmaps (often found in specialized platforms) are used to visualize where liquidity was left behind. These “voids” on the heatmap often align perfectly with Fair Value Gap zones, giving you another layer of confirmation.
11. Frequently asked questions about Trade Fair Value Gaps
12. Conclusion
Fair Value Gaps (FVGs) are powerful price action tools that help traders understand the footprints left by institutional money. When you combine an FVG with liquidity, order blocks, and a market structure shift, you can identify high-quality trading opportunities. This requires solid risk management.
The secret to how to trade fair value gaps is not finding every gap but finding the right gap (or inverse fair value gap) in the right context. This means managing volatility with a proper stop-loss order. To stay updated with more useful trading knowledge and strategies, be sure to follow Piprider.com.
