A Fair Value Gap (FVG) is a chart concept used by price‑action and “smart money” traders to mark zones where the market moved so quickly that some price levels received little or no trading. In practical terms an FVG highlights an imbalance between buyers and sellers: price impulsively pushed in one direction and left behind a patch of untested prices that may later attract the market to “rebalance.” Traders use FVGs to locate potential entries, stops and targets, but they are not a standalone guarantee—trading always carries risk and nothing here is personal trading advice.
How FVGs form: the three‑candle idea
Many traders define an FVG using a simple three‑candle pattern. The pattern begins with a strong impulsive candle, followed by an even larger continuation candle, and then a third candle that confirms the move without fully covering the area left behind. The gap of interest is the untraded space between the wick of the first candle and the wick of the third candle. That empty area is the FVG: it represents a price range that the market skipped during the impulse.
The pattern can appear in either direction. In a bullish FVG the impulse is upward and the gap sits below current price; in a bearish FVG the impulse is downward and the gap sits above current price. The concept is consistent across timeframes, so the same idea can show up on a 5‑minute chart or a daily chart — but the higher the timeframe, the more weight traders usually give the level.
Bullish and bearish FVGs — what to look for
A bullish FVG typically looks like this on a candlestick chart: a first candle sets the start of the move, the second candle pushes price sharply higher and the third candle closes without revisiting the lower wick of the first. The fair value gap is the area between the high of the first candle and the low of the third candle. Traders see that zone as a potential demand area where remaining buy orders could still be waiting.
A bearish FVG is the mirror image: an impulsive sell candle followed by a stronger bearish continuation and a third candle that leaves a gap between the low of the first and the high of the third. That zone can act as supply when price later returns, because leftover sell orders or institutional interest may still be present.
How to identify an FVG on a forex chart (step by step)
You can spot FVGs with a naked candlestick chart, or you can use tools to speed detection. Manually, follow these steps: first, watch for a clear impulsive move — a long candle or a sequence where price accelerates. Second, check the three‑candle structure: does the third candle leave a wick‑to‑wick non‑overlap with the first? If so, highlight the area between those wicks; that is your FVG. Finally, note whether price has already returned and filled that zone — once the gap is touched and liquidity is consumed, its usefulness decreases.
Many traders add confirmations before treating an FVG as tradable. Volume profile or session volume that shows a narrow node across the gap suggests low traded volume in the area, which supports the imbalance idea. Order‑flow measures — footprint charts or bid/ask delta — can reveal whether aggressive buying or selling created the impulse. On retail platforms you will also find automated FVG indicators that shade these zones, which helps when scanning multiple pairs.
Concrete example: imagine EUR/USD on the 1‑hour chart. A news‑driven sell impulse produces a long red candle, the next candle continues down aggressively and the third closes without overlapping the low of the first. The untested price band between the first candle’s low and the third candle’s high is the bearish FVG. If later price retraces into that band and shows a rejection wick or bearish order‑flow, a trader might consider a short with a stop above the gap and a target at the next structural support.
How traders commonly use FVGs — entries, stops and targets
Traders use FVGs in a few recurring ways, always combining the zone with context and confirmations. A common plan is to wait for a retracement back into the FVG zone and then look for a rejection signal: a pin bar, an engulfing candle, a footprint showing trapped aggressive counterparties, or a spike/ reversal in delta. Some traders place limit orders within the FVG (often near the midpoint) so they enter if the market returns, while others prefer to wait for a short‑timeframe confirmation before committing.
Stop placement typically sits just beyond the opposite edge of the FVG, or slightly outside the nearby swing high/low to allow for noise. Targets are chosen by market structure: the nearest meaningful support/resistance, a prior liquidity pool, or a fixed risk‑reward objective. Because FVGs are about imbalances, many traders treat a successful entry as a trade to join the original momentum; they often scale out early and trail the remainder.
A practical entry example: on a 15‑minute GBP/USD chart, price drops sharply creating a bearish FVG. The trader marks the gap and draws its midpoint. Price later retraces to the midpoint and prints a small rejection wick while the footprint shows large aggressive sell orders failing to push price higher. The trader enters a short at that point with a stop a few pips above the FVG’s top and a first target at the recent swing low.
Inverse FVGs, liquidity voids and relationship to order blocks
FVGs are closely related to other Smart Money concepts. An inverse FVG (sometimes called a “flip”) occurs when price breaks through an existing FVG and the zone changes role — for example, a former bullish FVG that price breaks below can act as resistance on a retest. Liquidity voids are similar ideas but tend to describe larger or multiple‑candle gaps: they represent extended areas of low traded volume where price accelerated. Order blocks — zones where institutions entered large orders — often sit near FVGs; when an FVG overlaps an order block the level gains confluence, which many traders prefer.
Practical tips for using FVGs in forex
Use FVGs in context. An FVG that aligns with the higher‑timeframe trend or with structural support/resistance carries more weight than one in isolation. Avoid trading every FVG you see; smaller gaps are more common and less reliable than large, clean imbalances. Consider session liquidity: gaps created during very thin sessions may behave differently than those formed during major market hours. If you rely on indicators or automated scripts, still visually inspect the zone — not every automatically shaded rectangle is meaningful.
Backtest and practice with replay or demo accounts before using real capital. In forex, spreads, swaps and slippage matter: a neat textbook entry can become unprofitable once execution costs and fast fills are considered. Finally, combine FVG analysis with a disciplined money‑management plan so a losing series cannot blow the account.
Common mistakes and important caveats
Fair Value Gaps are not magic. One common mistake is assuming every FVG will be filled; many never are, especially when they form as part of a sustained trend. Traders also tend to mark too many zones: cluttering your chart with every small imbalance makes decision‑making harder. Another pitfall is ignoring market context — an FVG inside a strong trend behaves differently from one during a choppy market. Forex specifics matter: wide spreads on exotic pairs, low liquidity in off‑hours, and fast news events can all turn a promising FVG setup into a losing trade.
Risk management is central. Stops can be hit before a move works, and fills are not guaranteed at a limit order if the market skips the price. Algorithmic or indicator detection can help find FVGs, but automation shouldn’t replace human judgement. Practice on a demo, test your rules over many examples and adapt sizing to the edge you expect to have. Remember: trading carries risk; this article is educational only and is not personalized trading advice.
Key Takeaways
- A Fair Value Gap (FVG) marks an untested price band created when price moves impulsively, usually identified with a three‑candle structure.
- Traders look for retracements into the FVG and confirmation (price rejection, order‑flow, volume profile) before entering, placing stops beyond the gap and targets at nearby structure.
- FVGs work better with context: align with higher‑timeframe trend, use confluence with order blocks or liquidity zones, and avoid trading every small imbalance.
- Trading carries risk; practice on a demo, backtest your rules, and apply disciplined risk management.
References
- https://atas.net/technical-analysis/fvg-trading-what-is-fair-value-gap-meaning-strategy/
- https://www.tradingview.com/chart/BTCUSDT.P/iqIwvthm-Mastering-Fair-Value-Gaps-FVG-How-to-use-them-in-trading/
- https://fxopen.com/blog/en/fair-value-gaps-vs-liquidity-voids-in-trading/
- https://www.xs.com/en/blog/fair-value-gap/
- https://trendspider.com/learning-center/fair-value-gap-trading-strategy/
- https://www.youtube.com/watch?v=UTO6e69GGSM