Fair Value Gap

Fair Value Gap (FVG) describes a price zone where the market moves sharply in one direction, leaving an area with little or no trading activity. This imbalance arises when aggressive buying or selling overwhelms the opposite side, causing price to jump over a range without filling orders. Traders view the gap as a potential area where price may later return to “fill” the void, making it a concept in advanced technical analysis.

How It Works

An FVG forms on a candlestick chart when three consecutive candles show a strong directional move and the body of the middle candle does not overlap with the bodies of the first and third candles. The gap is the price space between the high of the first candle and the low of the third candle (for a bullish gap) or between the low of the first candle and the high of the third candle (for a bearish gap).

Key points:

• Identification: Look for a large candle flanked by two smaller candles that do not reach into its body.
• Direction: Bullish FVG occurs during rapid upward moves; bearish FVG occurs during sharp declines.
• Zones: The gap itself is considered a zone of liquidity vacuum; price may later retrace to test this area.

Traders often draw horizontal lines at the gap’s boundaries and watch for price reaction when the market approaches those levels.

Why It Matters

Understanding FVGs helps traders anticipate potential support or resistance levels where price may pause or reverse. Because the gap reflects a temporary lack of trading interest, market participants may step in to execute pending orders, creating liquidity.

Example: A stock jumps from $50 to $55 in a single bullish candle, with the prior and following candles staying below $50 and above $55 respectively. The $50‑$55 zone is a bullish FVG. If the stock later pulls back to $52, traders may interpret the move as a “gap fill” and look for buying opportunities, expecting the upward trend to resume.

By integrating FVG analysis with other tools such as order‑blocks or volume profiles, advanced traders can refine entry and exit decisions, manage risk, and better interpret market imbalances.