How to Find Fair Value Gaps on Charts

The financial markets frequently present opportunities for observation and analysis, revealing patterns that can provide insights into price movements. A fair value gap represents a market inefficiency or imbalance. Understanding these gaps offers insight into price action, highlighting areas where the market may not have achieved complete price discovery.
These gaps provide a point of interest for market participants. They suggest where price might return to address previous imbalances. For individuals seeking to understand market dynamics, recognizing fair value gaps can contribute to a more comprehensive view of price behavior.

The Fair Value Gap Explained

Fair value gaps are a visual representation of temporary market inefficiencies, often appearing on price charts following rapid price movements. These movements typically result from significant buying or selling pressure, leading to price action that bypasses certain levels without sufficient trading activity. This creates what is sometimes referred to as a “liquidity void” or an “imbalance” in the market’s order flow. The market often revisits these areas to “fill” or “rebalance” the price, seeking equilibrium.

Factors such as major economic news, corporate earnings reports, or sudden shifts in market sentiment can trigger the rapid price changes that produce these gaps.

Fair value gaps are generally categorized into bullish and bearish types, based on the direction of the price imbalance. A bullish fair value gap forms during a strong upward price surge, indicating an excess of buying pressure. Conversely, a bearish fair value gap appears during a sharp downward price decline, signaling an overwhelming presence of selling pressure.

Pinpointing Fair Value Gaps on Charts

Identifying fair value gaps on price charts involves observing a specific three-candlestick pattern that visually represents the price imbalance. For a bullish fair value gap, locate three consecutive candlesticks where the high of the first candle does not overlap with the low of the third candle. The space between these two points, encompassing the middle candle, constitutes the fair value gap.

Conversely, to identify a bearish fair value gap, observe three consecutive candlesticks where the low of the first candle does not overlap with the high of the third candle. The empty space between these two non-overlapping wicks, around the middle candle, signifies the bearish fair value gap. The middle candle in both scenarios often displays a strong, decisive move, indicating the rapid price action that created the imbalance.

Once identified, these fair value gaps can be visually marked on the chart, typically by drawing a rectangular box or lines that span the area of the imbalance. Charting platforms offer various drawing tools for this process. While some platforms may provide automated indicators to highlight these gaps, manual identification allows for a deeper understanding of their formation.

Validating Fair Value Gap Signals

Not all fair value gaps hold equal significance, and their potential impact can vary depending on surrounding market conditions. One strengthening factor is the appearance of a fair value gap within a clear, established trend. A gap that aligns with the prevailing market direction may indicate a more robust imbalance.

The location of a fair value gap relative to other market structure elements also contributes to its validity. For instance, a fair value gap forming near key support or resistance levels, or in conjunction with concepts like order blocks, can enhance its potential importance. These confluent areas suggest that the imbalance is occurring at a price level where institutional activity or significant price reactions have historically taken place.

Additionally, the volume associated with the candles forming the gap can offer further confirmation. High volume during the formation of the gap-creating candles, or conversely, low volume within the gap itself, can provide additional insights into the conviction behind the price movement. Fair value gaps that remain “unmitigated,” meaning price has not yet fully re-entered and traded through the entire gap area, often retain more significance. While price may partially fill a portion of the gap, a complete rebalancing indicates that the market has addressed the inefficiency.