What Is a Fair Value Gap in Forex Trading?

The foreign exchange (forex) market is a global, decentralized marketplace for currency trading. Prices are constantly in motion, reflecting buying and selling activity. While price movements often appear fluid, they can exhibit abrupt shifts, leaving behind areas of market imbalance. These areas offer insights into the underlying forces driving price action.

What is a Fair Value Gap

A Fair Value Gap (FVG) represents a range on a price chart where trading activity was unbalanced, indicating a temporary market inefficiency. This imbalance occurs when price moves rapidly in one direction, leaving a void where insufficient trading took place to establish a “fair” price. Markets naturally seek equilibrium, and FVGs highlight where it was not achieved.

The formation of an FVG is identified by a three-candle pattern. The middle candle’s body is not overlapped by the wicks of the first and third candles. For example, in an upward surge, the first candle’s wick high might not touch the third candle’s wick low, forming the FVG around the second candle.

These gaps arise from rapid price movements triggered by large institutional orders, economic news, or shifts in market sentiment. Such events cause price to jump through levels without continuous trading, creating areas of low liquidity.

How to Identify Fair Value Gaps

Identifying a Fair Value Gap requires observing candlestick formations. Traders look for a three-candle sequence where the middle candle shows a strong directional move. The key visual cue is the absence of overlap between the wicks of the first and third candles. This lack of overlap defines the gap’s boundaries.

For a bullish Fair Value Gap, an upward price movement occurs where the first candle’s wick high does not touch the third candle’s wick low. The empty space between these wick extremes indicates a bullish FVG. Conversely, a bearish Fair Value Gap forms during a downward price move, characterized by the first candle’s wick low not touching the third candle’s wick high. The unfilled space between these wicks represents the bearish FVG.

FVGs appear across all timeframes, but their significance varies. Gaps on higher timeframes, such as daily or four-hour charts, are considered more reliable and impactful, as they reflect larger institutional activity rather than short-term fluctuations.

Interpreting and Using Fair Value Gaps

Fair Value Gaps are interpreted as areas where the market experienced an imbalance, and price may eventually return to “fill” or “rebalance” this inefficiency. This tendency for price to revisit these zones is described as a “price magnet” effect. The market seeks to re-establish a more balanced price discovery process within these previously skipped levels.

Fair Value Gaps can act as potential areas of support or resistance. For instance, a bullish FVG in an uptrend might serve as a support level if price retraces into it, offering a buying opportunity. Similarly, a bearish FVG in a downtrend could act as a resistance level if price attempts to move higher, presenting a selling opportunity.

Traders wait for price to return to the FVG’s edge, or even penetrate it, before considering an entry or exit point. Fair Value Gaps are analytical tools that highlight market inefficiencies, not standalone trading strategies. Their effectiveness is enhanced when combined with other technical analysis, such as trend analysis or market structure concepts, to confirm trade setups.