Markets are supposed to be efficient — every price should represent the fair meeting point of supply and demand. But in practice, during moments of strong institutional momentum, price moves so fast that the normal process of matching every buy order with a sell order breaks down. Price gaps through a range of levels without efficiently trading at each one. This creates a Fair Value Gap — a price zone where trades were not made at equilibrium, where the market moved past without balancing. These imbalances are significant because markets have a documented tendency to return to them — to fill the gap and complete the matching that the original move skipped.
What Is a Fair Value Gap?
A Fair Value Gap is identified using three consecutive candles. The first candle and the third candle are the reference points. If there is a price gap between the first candle's wick and the third candle's wick — an area that the middle candle passed through so quickly that neither the first nor the third candle traded there — that gap is the FVG.
In practice on forex charts — where true price gaps are rare because the market trades continuously — FVGs appear as areas where the middle candle moved so strongly that its wick on one side does not overlap with the adjacent candles' wicks on the other side. The FVG is the space between the top of candle one's wick and the bottom of candle three's wick (for a bullish FVG).
How FVGs Form
FVGs form during moments of strong directional momentum — typically when a large institutional order is being executed rapidly, when a high-impact news release creates a surge of one-sided orders, or when a key level break triggers a cascade of stop losses and pending orders simultaneously.
BULLISH FVG: Candle 1: Any candle. Upper wick high: 1.0850. Candle 2: Strong bullish candle. Opens below 1.0850. Closes well above — at 1.0920. The candle moves rapidly through the 1.0850-1.0920 range. Candle 3: Any candle. Lower wick low: 1.0895. FVG ZONE: 1.0850 to 1.0895. (Between Candle 1's high and Candle 3's low.) This zone was not traded efficiently. Price moved through it too fast. The market is likely to return here.
Bullish and Bearish FVGs
A bullish FVG forms during a strong upward move — the middle candle is strongly bullish and creates a gap between the first candle's high and the third candle's low. This gap represents a zone of bullish imbalance — if price returns to it, the expectation is a bullish reaction as the imbalance is filled from the underside.
A bearish FVG forms during a strong downward move — the middle candle is strongly bearish and creates a gap between the first candle's low and the third candle's high. This gap represents a zone of bearish imbalance — if price returns to it from below, the expectation is a bearish reaction as the imbalance is filled from the top.
Why Price Fills FVGs
The tendency for price to return to and fill FVGs is well-documented across markets. The theoretical explanation is that FVGs represent areas of price inefficiency — participants who wanted to buy (or sell) at prices within the gap were unable to because price moved through too quickly. When price returns to the FVG area, those unfilled orders become the mechanism for the fill — buyers enter at the gap levels they missed, creating support within the gap.
The practical observation is that FVG fills occur frequently — particularly on lower timeframes — but are not guaranteed. In strongly trending conditions, FVGs may remain partially unfilled for extended periods as the trend continues without correcting. FVGs on higher timeframes (daily and weekly) tend to be more significant and more reliably filled than those on lower timeframes.
Trading Fair Value Gaps
FVGs provide entry zones for trades in the direction of the original impulse. When a bullish FVG forms, it represents a potential support zone on a pullback. When price returns to the FVG, the expectation is a bounce from within the gap — providing a long entry with a tight stop below the FVG.
FVG Zone identified: 1.0850 to 1.0895. Original bullish impulse moved from 1.0840 to 1.0950. Price pulls back from 1.0950 and enters the FVG zone at 1.0895. Wait for candlestick confirmation within the zone. A bullish pin bar forms at 1.0865. Entry: Buy above pin bar high = 1.0878. Stop: Below FVG low = 1.0842. (Below the full gap — complete fill of a bullish FVG without reversal suggests the setup has failed.) Target 1: Previous swing high = 1.0950. Target 2: Measured move from FVG size projected above the prior high.
FVGs and order blocks often appear at the same price area — the impulse candle creating the FVG typically begins from an order block. When an FVG zone and an order block zone overlap, the confluence of two SMC concepts at the same price area significantly increases the probability of a reaction there. Always check whether an FVG you identify also has an order block at the same level.