Fair Value Gaps (FVG): How to Spot and Trade Price Imbalances

 


Have you ever noticed that price doesn’t always move smoothly? Sometimes, it leaves “empty spaces” on the chart where no real trading happened. These spaces are called Fair Value Gaps (FVGs), and they’re one of the most powerful clues in Smart Money Concepts (SMC).

Learn to spot them, and you’ll discover where price is most likely to come back before continuing its journey.

What Is a Fair Value Gap?

A Fair Value Gap happens when there’s an imbalance between buyers and sellers during a strong move.

It usually shows up as a 3-candle pattern:

  • Candle 1 (the start)

  • Candle 2 (the strong impulse move)

  • Candle 3 (the continuation)

If Candle 3 does not overlap Candle 1, that “gap” is a Fair Value Gap.

📌 In simple terms: It’s a space on the chart where price skipped trading.

Why FVGs Matter

  • Institutions leave imbalances: When big players push the market quickly, they don’t fill all their orders at once.

  • Price likes to return: Later, price often comes back to “fill the gap” before continuing in its direction.

  • High-probability zones: Traders use FVGs as entry or target areas.

How to Identify FVGs

  1. Look for a Strong Impulse Candle

    • Big bullish or bearish candle with strong momentum.

  2. Check the 3-Candle Formation

    • Candle 1’s wick and Candle 3’s wick should not overlap.

    • The space between them = FVG zone.

  3. Mark the Gap

    • Highlight the zone between Candle 1’s wick and Candle 3’s wick.

Example in Action

On GBP/USD, you see a huge bullish candle pushing price up.

  • Candle 1: A small bearish candle.

  • Candle 2: A giant bullish candle.

  • Candle 3: Another bullish candle that doesn’t overlap the first bearish candle.

That gap is an FVG. Weeks later, price dips back into that zone before taking off again.

How to Trade Fair Value Gaps

✅ Entry Strategy

  • Wait for price to return to the FVG zone.

  • Look for confirmation (wick rejection, engulfing, BOS).

✅ Stop Loss

  • Place below/above the FVG zone.

✅ Take Profit

  • Target liquidity levels or order blocks nearby.

Common Mistakes with FVGs

❌ Trading every gap you see (not all are valid).
❌ Ignoring higher timeframe FVGs (these are stronger).
❌ Entering without confirmation.

Final Thoughts

Fair Value Gaps are like magnets for price. They reveal where the market is likely to revisit before continuing. Combine them with Order Blocks and Break of Structure, and you’ll unlock high-probability trading setups.

👉 In the next post, we’ll dive into “Liquidity: The Fuel That Drives the Market.”

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