Fair Value Gap (FVG): A Complete Guide for Traders (2025)

What Is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) is a technical pattern that highlights an imbalance in price action. In ICT (Inner Circle Trader) methodology, an FVG represents a point where the market fails to trade efficiently, leaving behind a “gap” that shows where buying or selling pressure was dominant.

Put simply, the FVG meaning is a price imbalance created when one side of the market moves so aggressively that the opposite side has little or no opportunity to respond. The FVG full form, Fair Value Gap, emphasizes that these gaps often mark prices where the market has not traded at its “fair value.”

The 3-Candle Formation of an FVG

An FVG is typically identified through a three-candle formation:

1. Candle 1 (Impulsive Move Start): A strong candle forms in one direction (bullish candle or bearish candle), often fueled by heavy institutional orders.

2. Candle 2 (Continuation): The next candle continues strongly in the same direction, without revisiting the price levels left behind. This creates the imbalance.

3. Candle 3 (Confirmation): The final candle establishes the other side of the gap, leaving behind a “void” between Candle 1’s wick and Candle 3’s wick.

This gap is the “Fair Value Gap”, a price zone the market skipped over during the rapid move.

Why Do Institutional Traders Care About FVGs?

Institutional traders, such as banks and hedge funds, pay close attention to FVGs because they often act as magnets for price. Markets tend to revisit these imbalanced areas to “rebalance” liquidity.

By identifying FVGs, institutions can anticipate zones where price might retrace, creating opportunities for strategic entries or exits. In ICT concepts, these levels are seen as footprints of smart money, showing where large orders disrupted normal trading and where liquidity is likely to return.

How to Identify a Fair Value Gap (FVG) on a Chart

Traders often ask: how to identify a fair value gap? Below is a practical guide that combines both manual chart-reading and indicator-based methods.

FVG Step-by-Step Guide:

1. Spot the Initial Impulse Candle
   Look for a strong bullish or bearish candle that shows a sudden shift in momentum. This usually reflects aggressive buying or selling pressure.

2. Check for the Three-Candle Pattern
   A fair value gap example is best understood through the 3-candle structure:

   • Candle 1: A large impulse candle.

   • Candle 2: A continuation candle in the same direction, leaving untested price levels.

   • Candle 3: Forms without overlapping Candle 1’s wick, which creates the “gap.”

3. Locate the Gap Zone
   The FVG is the area between the high of Candle 1’s wick and the low of Candle 3’s wick (in a bullish scenario), or the opposite in a bearish scenario. This untested space is the fair value gap.

4. Use Indicators for Confirmation
   Some traders prefer to simplify the process with custom FVG indicators available on platforms like TradingView or MetaTrader. These tools automatically highlight imbalance zones, making it easier to scan multiple charts for FVG examples.

5. Confirm the Validity of the Gap
   Not every gap qualifies as a fair value gap. To confirm a valid FVG:

   • Ensure that the three-candle structure is intact.

   • Check that price has not already retraced into and filled the gap.

   • Validate with volume or liquidity shifts, which often accompany institutional moves.

6. Watch for Market Reaction
   Once identified, monitor how price behaves around the gap. If price retraces into the FVG and shows rejection, it strengthens the validity of the zone. If it fills completely, the FVG may no longer be tradable.

Common Mistakes to Avoid:

• Confusing normal gaps with FVGs: Standard open-close gaps between sessions are not the same as ICT-style fair value gaps.

• Ignoring candle wicks: Many beginners only compare candle bodies and miss the wick-to-wick imbalance.

• Overlooking context: An FVG is more reliable when aligned with trend direction, liquidity levels, or higher-timeframe analysis.

Bullish vs Bearish FVG: Key Differences

Fair value gaps can be categorized based on their direction and market context.

Bearish Fair Value Gaps

A bearish Fair Value Gap indicator occurs when there is a gap between the lowest point of the wick on the first candlestick and the highest point of the wick on the third candlestick.

This gap typically forms within the body of the middle candlestick pattern.

What is crucial is that a gap has formed within the middle candlestick due to the lack of connection between the wicks of the first and third candlesticks, indicating potential downward pressure.

Bearish fair value gaps are caused by factors such as negative economic news, disappointing earnings reports, or sudden shifts in market sentiment toward pessimism.

How to Spot a Bearish FVG

• Look for three consecutive candlesticks.

• Identify the lowest wick of the first candlestick.

• Identify the highest wick of the third candlestick.

• If there is no overlap between these two wicks and the gap lies within the body of the second candle, a bearish FVG may be present.

Confirm with volume or additional bearish signals for higher accuracy.
 

Bullish Fair Value Gaps

A bullish Fair Value Gap indicator forms when there is a gap between the highest point of the wick on the first candlestick and the lowest point of the wick on the third candlestick.

Similar to the bearish FVG, the exact direction of each candlestick is not the main focus. What matters most is the presence of a gap within the middle candlestick where the wicks of the first and third candlesticks do not meet.

This gap signifies potential upward momentum and buying opportunities.

Bullish fair value gaps are typically triggered by positive economic news, better-than-expected earnings reports, or a sudden shift in investor sentiment towards optimism.

How to Spot a Bullish FVG

• Observe three consecutive candlesticks.

• Identify the highest wick of the first candlestick.

• Identify the lowest wick of the third candlestick.

• If the two wicks do not touch and the middle candle’s body contains the gap, this may indicate a bullish FVG.

• Look for confirmation such as rising volume or bullish indicators before entering a trade.

FVG Trading Strategy: Entry, Exit & Stop-Loss Rules

A fair value gap trading strategy relies on spotting imbalances in price action and using them as high-probability trading zones. To trade FVGs effectively, traders must follow precise rules for entry, risk management, and exits while confirming setups across multiple timeframes.

Entry Conditions

When planning to trade an FVG, follow these entry criteria:

• Bullish FVG Entry:
   

  • Identify a three-candle bullish formation where a gap exists below the current price.

  • Wait for price to retrace into the gap zone.

  • Enter long when price touches the FVG and shows bullish confirmation (e.g., bullish engulfing, hammer, or strong rejection wick).

• Bearish FVG Entry:

  • Identify a three-candle bearish formation where a gap exists above the current price.

  • Wait for price to retrace upward into the gap.

  • Enter short once bearish confirmation appears (e.g., bearish engulfing, shooting star, or rejection wick).

• Partial Fill Setup:

  • Conservative traders may wait for a full gap fill, while aggressive traders may enter at the 50% midpoint of the gap for better risk-to-reward positioning.

Multiple Timeframe Confirmation

Confirming FVGs across timeframes reduces false signals:

• Higher Timeframe (HTF): Use daily or 4H charts to spot major FVG zones.

• Lower Timeframe (LTF): Drop to 1H, 15M, or 5M charts to refine entries within the HTF zone.

• Rule of Alignment: Only take trades in the direction of the higher-timeframe trend. For example, trade bullish FVGs during an uptrend and bearish FVGs during a downtrend.
   

Position Sizing Recommendations

Proper sizing ensures sustainable risk management:

• Risk 1–2% of account equity per trade (never exceed 3%).

• If trading multiple FVG setups, reduce risk per trade to avoid overexposure.

• For partial fill entries (more aggressive), use smaller position sizes compared to full retracement entries.
   

Stop-Loss Placement Rules

Stop-loss levels should protect against invalidation of the setup:

• Conservative Approach: Place stop-loss order just beyond the FVG boundary (below the gap for longs, above the gap for shorts).

• Aggressive Approach: Place stop-loss slightly inside the FVG zone for tighter risk, but accept higher probability of being stopped out.

• Always adjust stops based on market volatility, wider stops in high-volatility markets, tighter in low-volatility conditions.

Take-Profit Targets

Strategically exiting trades is key to protecting gains:

• First Target: Nearest market structure level (recent swing high for longs, swing low for shorts).

• Second Target: Midpoint of the FVG or opposing liquidity zones.

• Final Target: Major support/resistance, Fibonacci levels, or institutional order blocks in line with trend direction.

• Use a partial exit strategy: scale out 50% at the midpoint of the gap and trail the rest using a moving average or adjusted stop-loss.

FVG Timeframe Analysis: Scalping to Position Trading

When it comes to fair value gap trading, choosing the right timeframe is crucial. Fair value gaps can appear on any chart, whether you're trading stocks, forex, or cryptocurrencies. However, different timeframes can provide different insights into how the market reacts to these gaps.

Short-Term Timeframes (Intraday Trading)

For traders who focus on short-term moves, such as day traders and scalpers, using smaller timeframes like 1-minute, 5-minute, or 15-minute charts can help spot fair value gaps that may fill quickly.

These gaps are often caused by sudden news or market volatility.

• Optimal Settings: 1M, 5M, 15M charts with volume and liquidity indicators.

• Typical Hold Times: Seconds to a few hours.

• Risk Parameters: Tight stop-losses (5–15 pips in forex, depending on volatility); risk no more than 0.5–1% per trade.

• Best Instruments: Major forex pairs (EUR/USD, GBP/USD), gold (XAU/USD), and high-volume US equities.

• Special Note – Bitcoin Fair Value Gaps: On short-term BTC charts, gaps can appear after sudden liquidations or funding-driven moves; these may fill very quickly but require extra caution due to volatility.

Benefits of short-term trading fair value gaps:

• Quick trading opportunities based on gap fills.

• Smaller stop-loss levels for better risk management.

• Frequent trading opportunities throughout the day.

However, short-term gaps can sometimes be less reliable due to market noise and unpredictable price action. That's why traders often use a fair value gap indicator to confirm potential trade setups.

Medium-Term Timeframes (Swing Trading)

If you're a swing trader looking for trades that last a few days to weeks, medium-term timeframes like the 1-hour or 4-hour charts are ideal.

Fair value gaps on these charts tend to reflect stronger market movements, offering better trade reliability.

• Optimal Settings: 1H and 4H charts with moving averages and momentum tools.

• Typical Hold Times: 1–5 days, sometimes up to 2 weeks.

• Risk Parameters: Moderate stop-losses (20–50 pips in forex); risk 1–2% of equity per trade.

• Best Instruments: Major forex pairs, indices (S&P 500, NASDAQ), gold, and Bitcoin fair value gaps, which often occur after macro-driven moves (FOMC decisions, ETF approvals, halving cycles).

Why medium-term timeframes are useful for fair value gap trading:

• Gaps are more meaningful and easier to analyze.

• Market conditions have more time to stabilize.

• Provides a balance between frequent opportunities and reliable setups.

Traders often use technical tools like moving averages and momentum indicators alongside fair value gap indicators to strengthen their trading decisions.

Long-Term Timeframes (Position Trading)

For long-term traders or investors, fair value gaps on daily, weekly, or monthly charts can provide insights into larger market trends. These gaps usually occur due to significant economic events or major shifts in market sentiment.

• Optimal Settings: Daily, Weekly, Monthly charts with trend and liquidity mapping.

• Typical Hold Times: Weeks to months.

• Risk Parameters: Wider stops (100+ pips in forex or $500–$1000 in commodities); position size adjusted down to keep risk within 1–2%.

• Best Instruments: Currencies with strong macro drivers (USD, JPY, EUR), commodities (gold, oil), indices, and Bitcoin fair value gaps tied to long-term cycles (halving, ETF inflows).

Advantages of long-term fair value gap analysis:

• Provides a clear picture of market direction.

• Helps identify key support and resistance zones.

• Suitable for traders who prefer lower trade frequency and higher accuracy.

While fair value gaps on higher timeframes take longer to fill, they often align with strong trends, making them valuable for strategic trading decisions.

How to Choose the Right Timeframe for Fair Value Gap (FVG)

The best timeframe for fair value gap trading depends on your trading style, risk tolerance, and market conditions.

Day traders may prefer shorter timeframes for quick entries, while swing traders and investors might focus on longer timeframes for more reliable setups.

Regardless of the timeframe you choose, using a fair value gap indicator can help you accurately identify gaps and improve your overall trading strategy.

Multi-Timeframe Analysis Approach

A strong fair value gap trading strategy integrates multiple timeframes:

1. Higher Timeframe (Daily/4H): Identify the major FVG zones that mark institutional footprints.

2. Lower Timeframe (1H/15M): Refine entries inside the higher timeframe zone.

3. Execution Timeframe (5M/1M): Use precision signals (candlestick patterns, order flow) for actual trade placement.

This top-down method filters out weak setups and ensures trades align with broader trend direction.

Best FVG Indicators & Detection Tools

Identifying Fair Value Gaps manually can be time-consuming, especially in fast-moving markets. Fortunately, traders can rely on specialized tools and indicators to detect these inefficiencies more efficiently and accurately. Below are common methods used to identify FVGs on price charts:

FVG Indicators on Trading Platforms

Many platforms like TradingView, MetaTrader 4/5, offer custom indicators or community-built scripts specifically designed to highlight Fair Value Gaps. These tools automatically mark zones where a gap between the first and third candlestick wicks exists, often shading the FVG zone for visual clarity.

Smart Money Concept Indicators

Indicators based on Smart Money Concepts (SMC) often include FVG detection as part of broader tools. These indicators typically combine order blocks, liquidity zones, and FVGs to provide a full institutional-level view of market structure. They are especially useful in ICT-based strategies.

Manual Chart Analysis

For traders preferring manual detection:

• Look for three-candle formations.

• Mark the zone between the first candle’s wick (high or low) and the third candle’s wick (opposite wick).

• The gap should be entirely within the body of the middle candle and not touched by wicks on either side.
   

Volume Profile + Price Action Tools

By combining volume profile indicators with FVG detection, traders can validate whether a gap zone coincides with low-volume areas, enhancing confidence in potential retracement zones.

Algorithmic and AI-Based Tools

Advanced trading software, including algorithmic models or machine learning tools, can be programmed to identify FVGs based on user-defined rules, providing automated alerts for potential setups.

Specific Indicators for MetaTrader 4/5

• FVG.mq4 / FVG.mq5: Custom scripts available from MQL5 marketplace that mark imbalance zones with rectangles.

• SMC Indicators for MT4/5: Paid versions often include FVG, order block, and liquidity sweeps.

• Rectangular Zone Indicators: Generic rectangle-drawing indicators that can be configured to highlight gaps.

Specific Indicators for TradingView

• Fair Value Gap [by LuxAlgo]: A popular free indicator that automatically shades imbalance zones on any timeframe.

• ICT Fair Value Gap (Community Scripts): Multiple free versions available; highlights bullish and bearish FVGs with color codes.

• Smart Money Concepts Tools (Paid & Free): Often combine order blocks, liquidity zones, and FVGs into one package.

Setup Instructions for Top Indicators

1. TradingView (LuxAlgo FVG)

   • Open TradingView > Indicators > Search “Fair Value Gap.”

   • Add LuxAlgo’s FVG indicator.

   • Customize settings (bullish zones = green, bearish = red).

   • Save as a template for easy access.

2. MetaTrader (FVG.mq5)

   • Download the indicator file from the MQL5 marketplace.

   • Place it inside: MQL5 > Indicators folder.

   • Restart MetaTrader.

   • Go to Navigator > Indicators > Drag onto chart.

   • Adjust parameters (timeframe sensitivity, zone coloring).

How to Interpret Indicator Signals

• Bullish FVG Signal: Price retraces into a green zone (below current price) → Look for long entries with bullish candlestick confirmation.

• Bearish FVG Signal: Price retraces into a red zone (above current price) → Look for short entries with bearish confirmation.

• Invalidation: If price fully closes through the gap with strong volume, the FVG is considered filled and no longer valid.

What Causes a Fair Value Gap (FVG) in Trading?

Several factors can cause a fair value gap, including:

Economic News and Announcements

Major economic events, such as interest rate decisions, employment reports, and GDP releases, can cause significant market movements.

When these announcements occur outside of regular market hours, they can lead to a fair value gap as the market reacts to the new information once trading resumes.

Earnings Reports

Corporate earnings reports can also trigger fair value gap trading.

Positive or negative earnings surprises often lead to sharp price movements when the market opens, creating a gap between the previous closing price and the new opening price.

Market Sentiment

Sudden shifts in market sentiment, driven by geopolitical events, natural disasters, or changes in investor confidence, can cause rapid price movements that result in fair value gaps.

These events can lead to panic buying or selling, creating gaps as the market adjusts to the new sentiment.

Supply and Demand Imbalances

Significant imbalances between supply and demand can cause fair value gaps.

For example, a large institutional order placed outside of regular trading hours can create a gap as the market opens and prices adjust to reflect the new supply or demand levels.

FVG vs Order Blocks vs Imbalances vs Price Gaps: Key Differences

While all four concepts relate to inefficiencies or institutional activity in price movement, each reflects a unique type of market behavior with different trading implications.

Fair Value Gap vs. Order Block

A fair value gap and an order block serve different functions in trading, but both provide key insights into market movements.

A fair value gap represents a price gap between the closing price of one period and the opening price of the next, indicating a temporary market inefficiency.

On the other hand, an order block refers to a price zone where large institutional orders, such as those placed by banks or hedge funds, have been executed.

These zones often act as significant support and resistance levels, as the price tends to react strongly when revisiting them.

While fair value gap trading focuses on gaps that may get filled, order block trading revolves around key price zones where large players have entered the market, offering high-probability trading opportunities based on those levels.

Fair Value Gaps vs. Imbalances

While both fair value gaps (FVGs) and market imbalances highlight inefficiencies in the market, they differ in how they appear and impact price action.

A market imbalance occurs when there is a significant difference between buying and selling pressure, often leading to one-sided price movement.

Unlike FVGs, imbalances do not always leave visible gaps on the chart but can still indicate areas where price may revisit to rebalance supply and demand.

Key differences between fair value gaps and imbalances:

• Visibility: FVGs are visible gaps on the chart, while imbalances may appear as extended price movements.

• Cause: Imbalances are often driven by large institutional orders, whereas FVGs result from rapid price movement with little trading in between.

• Trading Approach: Traders use FVGs to anticipate price retracements, while imbalances help identify areas where market participants may step in to restore equilibrium.

Using a fair value gap indicator can help traders spot potential trading opportunities, but understanding market imbalances alongside FVGs provides a more complete view of price action.

Fair Value Gap vs. Liquidity Voids

In institutional and smart money trading strategies, both Fair Value Gaps (FVGs) and Liquidity Voids are key concepts used to identify inefficiencies in price movement. While they often appear similar on the chart, they serve different analytical purposes and reflect distinct market dynamics.

Both FVGs and liquidity voids represent imbalances in price caused by aggressive buying or selling. They are typically seen as areas the market may return to in order to "rebalance" supply and demand.

Traders use both concepts to identify potential retracement zones, entry points, or areas where institutions may re-enter the market.

Fair Value Gaps vs. Other Price Gaps

Understanding the differences between fair value gaps and other types of price gaps is crucial.

Fair Value Gaps vs. Common Gaps

Fair Value Gaps typically indicate potential areas where the market will retrace to fill the gap, reflecting underlying market inefficiencies.

Whereas Common Gaps often occur in non-trending markets and are usually filled quickly without significant trading opportunities.

Fair Value Gaps vs. Breakaway Gaps

Fair Value Gaps occur during regular trading and suggest a potential retracement to fill the gap. On the other hand, Breakaway Gaps happen at the beginning of a new trend, often due to a breakout from a consolidation pattern, and are less likely to be filled immediately.

Fair Value Gaps vs. Exhaustion Gaps

Fair Value Gaps indicate a temporary market inefficiency that will likely be corrected.

However, Exhaustion Gaps occur near the end of a significant price move, signaling a potential reversal or the end of the current trend.

Fair Value Gaps vs. Inverse Fair Value Gaps

Fair Value Gaps represent bullish or bearish imbalances in price action where the market is expected to retrace and "fill" the inefficiency.

In contrast, Inverse Fair Value Gaps (also known as inefficient price expansions in the opposite direction) occur when price returns into a previously balanced or filled area, breaking through a fair value region without hesitation. This often signals strong momentum or a change in market sentiment, and unlike standard FVGs, they may not get filled, as the imbalance has already been corrected or reversed.

Algorithmic Trading and Fair Value Gaps

Algorithmic trading, also known as algo trading, uses automated systems to identify and execute trades based on predefined criteria, such as price gaps, volume, and technical forex indicators.

Trading algorithms are programmed to scan large amounts of market data in real-time to detect fair value gaps across different timeframes. These algorithms use a variety of techniques to spot gaps, including:

• Pattern Recognition: Identifying gap formations based on price action and historical data.

• Fair Value Gap Indicators: Specialized indicators highlight gaps on charts, making it easier for algorithms to act upon them.

• Volume Analysis: Algorithms analyze trading volume to confirm whether a gap is likely to be filled or continue in the trend direction.

• Momentum Tracking: Monitoring price momentum to determine if a fair value gap presents a trading opportunity.

By using these methods, algorithmic trading systems can identify fair value gaps more efficiently than manual analysis, allowing for quicker decision-making.

Common FVG Trading Mistakes & Risks

New traders often misunderstand or misuse the fair value gap trading strategies. Here are the common mistakes to avoid:

• Assuming all gaps will be filled: Not every gap will be retraced, and relying solely on gap fills can lead to significant losses if the price moves further away from the gap.

• Ignoring the broader market context: Failing to consider factors such as major news events or economic data releases that may cause the gap can result in poor trading decisions.

• Entering trades too early: Traders often enter positions before confirming that the gap will be filled, which can lead to premature stop-outs or losses.

• Over-leveraging positions: Overestimating the likelihood of a gap being filled without proper risk management can result in larger-than-expected losses.

How to Avoid False FVG Signals

Not every shaded zone or gap is a trade-worthy Fair Value Gap. To filter out false FVG signals, follow these tips:

1. Check Higher Timeframes: Only trade FVGs that align with the broader trend on 1H, 4H, or Daily charts.

2. Avoid Low Liquidity Sessions: Gaps formed during Asian session or illiquid hours are often unreliable.

3. Look for Volume Confirmation: Valid FVGs usually coincide with strong volume or liquidity sweeps.

4. Use Confluence: Combine FVGs with support/resistance, order blocks, or RSI divergence for stronger setups.

Wait for Reaction, Not Just Zone: Don’t enter the moment price touches the FVG. Look for rejection wicks, engulfing candles, or other confirmation signals.

FVG Trading: Advantages & Limitations

Fair Value gaps have several advantages as well as limitations:

Advantages

• Improved Market Timing: Fair value gaps help traders identify optimal entry and exit points.

• Enhanced Decision-Making: Provides clear signals based on market inefficiencies.

• Potential for Higher Profits: Effective use of fair value gaps can lead to profitable trading opportunities.

Limitations

• Potential for False Signals: Not all gaps will be filled, leading to possible false signals.

• Market Conditions: The reliability of fair value gaps can vary depending on market conditions.

• Risk Management: Requires careful risk management to avoid significant losses.

Conclusion

Fair value gaps offer a simple but powerful way to understand what’s happening behind the scenes in the market. They show areas where the price moved too quickly, leaving unfinished business behind. By learning how to spot these gaps and knowing what they might mean, traders can better time their entries, exits, and overall strategies.

Like any tool, they’re not perfect, but when used with other forms of analysis and careful planning, fair value gaps can help you make more thoughtful and informed trading decisions.