In trading, every candle tells a story — but sometimes, parts of that story are skipped. When the market moves so quickly that it jumps over certain price levels, it leaves behind an imbalance known as a Fair Value Gap (FVG). These gaps aren’t random; they often reveal areas where institutional traders have pushed price aggressively, leaving footprints that price may later revisit. For smart money traders, understanding FVGs can unlock opportunities for well-timed entries, precise stop placements, and improved risk management.

What is a Fair Value Gap in Trading?

In technical analysis, a Fair Value Gap (FVG) represents a price imbalance that occurs when the market moves rapidly, skipping over certain price levels and leaving a visible gap between candles. These gaps represent areas where little to no trading occurred, often due to aggressive buying or selling by large institutions. For smart money and price action traders, these gaps are key zones to watch for potential retracements, reversals, or entries.

How Fair Value Gaps Form

A fair value gap in trading typically forms during high volatility or strong momentum. For example, when a bullish move occurs and a candle opens significantly higher than the previous close—without overlapping it—it creates a gap. This gap shows that there was no opportunity for price to “fairly” fill in the space between those levels. Essentially, the market skipped over that area, creating an imbalance.

Traders believe that the market often returns to these gaps to "fill" or "rebalance" them, as liquidity seeks to be matched at fair value. This makes FVGs useful in identifying potential pullbacks in trending markets.

Why Fair Value Gaps Matter

Fair value gaps are more than just chart anomalies, they signal important market behaviour. When price skips levels, it shows urgency. That urgency is typically driven by large institutional orders or news events. Because these gaps are created by imbalances in order flow, many traders interpret them as areas where price is likely to revisit before continuing its trend.

In simple terms, fair value gaps act like magnets. While not guaranteed, the market often comes back to these zones to test the level, offering strategic entry opportunities with defined risk.

Using FVGs in Your Trading Strategy

To trade using the fair value gap concept, you first need to spot the imbalance. Look for a three-candle pattern where the middle candle’s body does not overlap with the previous and following candle. This clean gap signals a possible FVG.

After spotting a fair value gap, traders typically anticipate a price pullback into the gap area before placing a trade. In an upward trend, this gap often acts as a potential demand zone where buying interest may return. In a bearish setup, it acts as a supply zone. Combining FVGs with confirmation signals—like support/resistance, trendlines, or volume—can increase the probability of success.

Conclusion

The fair value gap is a powerful concept that reveals where the market may want to “revisit” before continuing in its direction. It reflects the reality of how institutional players leave footprints in price action. While not every gap gets filled, understanding FVGs adds depth to your chart analysis and can improve trade timing and accuracy.