What Is a Fair Value Gap (FVG) in Trading?

Technical analysis in financial markets examines past price movements and trading volumes to forecast future price direction. Traders use various tools and concepts to identify patterns and inefficiencies in price action. These analytical methods help in recognizing areas where price has moved in a way that suggests an imbalance, indicating potential future price adjustments.

Understanding Fair Value Gaps

A Fair Value Gap (FVG) represents an inefficiency or imbalance in price delivery, occurring when price moves rapidly in one direction without sufficient opposing movement. These gaps signify a price range where buying and selling activity was unbalanced. The market tends to skip over certain price levels quickly, creating an “empty” area where minimal or no trading occurred. This rapid price movement suggests that orders were not fully balanced, leading to a void in price action.

An FVG is identified through a specific three-candle pattern on a price chart. For a bullish FVG, a gap exists between the high of the first candle and the low of the third candle. Conversely, a bearish FVG forms when there is a gap between the low of the first candle and the high of the third candle. The space between these wicks, untouched by the first and third candles, defines the Fair Value Gap. This pattern highlights an area where the market moved too quickly for liquidity to keep up, leaving an imbalance that price may revisit.

Locating Fair Value Gaps on Charts

Identifying Fair Value Gaps on trading charts involves observing specific visual cues within candlestick patterns. Traders look for a strong, impulsive price move characterized by three consecutive candles. The key visual element is the lack of overlap between the wick of the first candle and the wick of the third candle. This “gap” is the area where the price has moved significantly without being fully traded across all levels. Once identified, these gaps can be visually marked or drawn on a chart using charting platform tools, highlighting the specific price range where the imbalance exists.

Interpreting Fair Value Gaps in Trading

Fair Value Gaps are interpreted as areas of market inefficiency that price is likely to revisit or “fill” in the future. The underlying idea is that markets naturally seek equilibrium, and these gaps signal an area where price might return to rebalance orders and achieve efficiency. This makes FVGs potential magnets for price action, as the market may be drawn back to these levels.

These gaps are frequently viewed as potential areas of support or resistance when price re-enters them. A bullish FVG, for instance, might act as a support zone if price retraces, while a bearish FVG could serve as a resistance level. The rapid movement that creates an FVG implies a liquidity void, meaning there was a lack of opposing orders in that specific price range. FVGs are considered important because they highlight zones where institutional trading activity or significant market events caused a rapid shift, leaving behind an imbalance that the market may eventually correct.

Practical Considerations for Fair Value Gaps

Fair Value Gaps are often used as a confluence factor in technical analysis, rather than a standalone indicator. Traders typically consider FVGs alongside other analytical tools, such as trend lines, support and resistance levels, or volume analysis, to build a more comprehensive market view. This integrated approach helps confirm potential areas of interest and strengthens the conviction behind analytical decisions.

FVGs can be considered as potential targets for price movement or as areas where price might react. For example, if a bullish FVG forms, price might dip into that area before continuing its upward trend. Conversely, a bearish FVG might see price rally into the gap before resuming a downward move. While FVGs indicate where price might go or react, their utility lies in highlighting zones of potential market rebalancing that can inform a broader understanding of price action.