Fair Value Gaps (FVGs) are three-candle price imbalances where institutional orders moved price so aggressively that no two-way auction occurred. They represent unfinished business in the order book — and price has a statistical tendency to return to these zones.
FVG Formation Mechanics
An FVG forms when the wick of candle 1 and the wick of candle 3 don't overlap. The gap between them is the Fair Value Gap. The middle candle (candle 2) is the displacement candle — it represents the moment of aggressive institutional order flow.
For a bullish FVG: the gap forms between the high of candle 1 and the low of candle 3 during an upward move. For a bearish FVG: the gap forms between the low of candle 1 and the high of candle 3 during a downward move.
Why FVGs Get Filled
The reason is rooted in market microstructure. When price moves too fast in one direction, it creates an inefficiency — a price range where buyers and sellers never properly matched. Market-making algorithms are designed to seek efficiency, and institutional order flow gravitates back to these zones to rebalance. Studies show that approximately 70-80% of FVGs on the 1H timeframe and above get at least partially filled within 20 candles.
The 5-Point FVG Quality Filter
1. HTF Alignment: The FVG must align with the higher-timeframe bias. 2. Displacement Strength: The middle candle should have a large body relative to recent candles. 3. Unmitigated: The gap hasn't been previously tested. 4. Confluence: The FVG overlaps with an order block or key level. 5. Session Context: Formed during high-volume trading sessions (London/NY for forex).
Entry, Stop, and Target
Enter at the 50% mark of the FVG (the midpoint between the high and low of the gap). Stop loss goes beyond the entire gap — if the full gap gets swept, the thesis is invalidated. Target the next significant liquidity pool or structure level. This setup typically gives 1:2 to 1:3 risk-to-reward.
Inversion Fair Value Gaps
An FVG is not permanent support or resistance. When price closes decisively through an FVG instead of respecting it, that gap inverts: a former bullish FVG that fails becomes resistance, and a failed bearish FVG becomes support. These inversion FVGs are high-quality levels precisely because they mark where one side's expectation was broken — trade the retest of the inverted gap in the new direction.
Not All Gaps Are Equal
Context separates a tradeable FVG from noise. A gap created by strong displacement away from a higher-timeframe point of interest carries real intent; a random gap in the middle of a range does not. Higher-timeframe FVGs outrank lower-timeframe ones, and a gap with order-block or liquidity confluence is far more likely to be respected. Filter ruthlessly.
Frequently asked questions
What is a fair value gap (FVG)?
A fair value gap is a three-candle formation where the wicks of candle 1 and candle 3 do not overlap, creating an imbalance zone that price tends to revisit.
Do fair value gaps always get filled?
Not always. Strong trend FVGs in premium/discount zones may only partially fill or not fill at all. The quality of the FVG and the overall market context determine fill probability.
How do you combine FVGs with order blocks?
Look for FVGs that overlap with order blocks — this confluence creates high-probability entry zones. Enter when price returns to the overlapping zone with confirmation.