Fair Value Gap (FVG) or market imbalance is the space on a candlestick chart where trading did not occur at a particular price level. It forms when the market moves too fast in one direction that it leaves behind a three-candle pattern.
The most important characteristic of this formation is that the wicks of the first and third candles do not overlap within the range of the middle candle’s movement.
In simpler terms, it is an internal inefficiency within continuous candles.
These price voids can guide traders to anticipate possible future retracement levels, entry or exit points.
Let’s discuss why fair value gaps happen, steps to identify, and how to implement it for your advantage:
1. Breaking (or unexpected) news/announcements: Major economic reports (like NFP, CPI data, interest rates decisions), geopolitical events or any unpredictable market-shocking release can trigger an instant/forceful reaction from one party of market participants.
This rapid influx of orders in one direction can overwhelm the opposing side. The result? Price jumps quickly without enough counter-orders to fill all price levels.
2. Big institutional orders: Banks and hedge funds trade massive amounts. Large buying or selling can consume liquidity (push price through various levels with little resistance), thereby creating a FVG.
BISI (Buy side imbalance, sell-side inefficiency), SIBI (Sell side imbalance, Buy side inefficiency)
1. Find three consecutive candles.
2. Check for wick disconnection. In a bullish move, the low of the third candle should be higher than the high of the first candle. In the case of a bearish move, confirm that the high of the third candle is lower than the low of the first one.
3. Next, mark the “gap” zone. Highlight the imbalance (empty) area using a rectangular box. This space becomes your reference for potential trade setups.
Trading fair value gaps is most effective in trending and some range-bound markets. To trade;
1. Firstly, identify the FVG
2. Trade in the direction of the initial price surge that created the gap. If the middle candle is bullish, await a pullback into the FVG before considering a long entry. And enter a short position after the price has rallied into the FVG and shows signs of rejection.
3. Place (enter) your trade at the nearest edge of the gap.
4. Watch out for invalidations. Your entry may be invalid if price breaks beyond a key structural level (for example, the swing high/low that preceded the FVG).
5. And lastly, you want to ignore overnight gaps. Fair Value Gaps do not include price gaps that occur due to market closure.
6. Stop loss placement: For a buy trade, put your stop just below the FVG. For a sell trade, you can set your stop at the upper edge of the gap.
What timeframe is best for spotting FVGs?
Higher timeframes like H1, H4, and Daily tend to produce more reliable and trade-worthy gaps.
Does first presented fvg require daily bias?
The first presented fair value gap doesn’t REQUIRE a daily bias (DB) to exist or form. But the alignment of DB and the first presented FVG could mean a high-probability trade opportunity.
Do fair value gaps always get filled?
No. While many gaps do get filled, some remain untested for long periods or get invalidated. Use structure and context for confirmation.
Are FVGs a new concept?
Although the term is modern and popularised by smart money traders, the idea of price inefficiency has long existed under other names like “imbalance” or “price void.”
Can beginners trade fair value gaps?
Yes, but they must first understand market structure and risk management.
What indicators work well with market imbalance?
You can pair them with support/resistance, fibonacci levels, or RSI for stronger confluence.