Understanding Fair Value Gaps (FVGs)
Definition of a Fair Value Gap
Let’s cut right to it, a Fair Value Gap (FVG) is a price imbalance on a chart where the market moves so quickly that not every price level within a move is transacted. Think of it as a skipped beat in the rhythm of market pricing.
In Forex trading, this typically shows up as a three-candle structure on your chart:
- The first candle shows a move (say, bullish).
- The second candle continues strongly in the same direction.
- The third candle opens beyond the previous candle’s close, leaving a “gap” between the first and third candles—this is your FVG.
But wait—aren’t there no gaps in Forex due to its 24/5 structure? Technically, yes. Unlike stocks, Forex doesn’t often visibly gap on charts. But FVGs aren’t traditional price gaps—they’re inefficiencies that represent unbalanced order flow, and they matter big time to institutional traders and smart money.
What Causes Fair Value Gaps?
Market Imbalances
The most common culprit is order imbalance. Imagine a flood of buy orders hitting the market. The price leaps up, skipping price levels where sellers could’ve responded. That skipped range = fair value gap.
Economic News and Earnings Reports
High-impact events like NFP (Non-Farm Payrolls), FOMC meetings, or unexpected inflation data create volatility surges. These cause candles to extend aggressively, often leaving gaps in their wake.
Institutional Trading Activity
Big players like hedge funds, central banks, and prop firms don’t trade in baby-sized lots. Their massive positions can move markets abruptly, creating FVGs that smaller traders can later use for entry or confirmation.
The Structure of a Fair Value Gap on a Chart
A typical FVG structure looks like this:
- Candle 1: A normal price bar.
- Candle 2: An explosive movement in one direction.
- Candle 3: Opens beyond the high or low of Candle 1, skipping prices.
This forms a three-candle sequence where the middle candle is the anchor of the gap. The area between the wick of Candle 1 and wick of Candle 3 is your “gap zone.” This zone often acts as a magnet for price retracements, especially if institutional traders left unfilled orders there.
Types of Fair Value Gaps in Forex
Bullish Fair Value Gaps
A bullish FVG forms when price surges upward so rapidly that some price levels go untouched. These gaps represent areas of strong buying interest—usually from institutions—where price may later retrace to “fill” the inefficiency before continuing upward.
For example:
- Candle 1: Closes at 1.1050
- Candle 2: Opens at 1.1055, closes at 1.1100
- Candle 3: Opens at 1.1110
The unfilled price area between 1.1050 and 1.1110 is the bullish FVG zone. If price comes back to this level, it’s often seen as a premium entry point for long trades.
Bearish Fair Value Gaps
A bearish FVG is the inverse. It forms during a sharp move down when selling pressure is so strong that certain buy levels are left untouched. These are potential sell zones when price retraces to fill the gap.
Think of bearish FVGs as liquidity traps for retail traders who enter too late—often right before institutions push price in the opposite direction.
Inverse Fair Value Gaps
An advanced concept, inverse FVGs occur when the market quickly retraces into a previous gap and fails to continue in the original direction. This may suggest a market reversal or exhaustion.
Traders often use inverse FVGs to identify false breakouts or areas where the market tries to continue but fails due to exhausted momentum or fresh institutional interest.
Liquidity Voids vs. Fair Value Gaps
While both FVGs and liquidity voids show imbalances, they’re not the same thing:
- FVGs are precise, measurable zones based on candle structure.
- Liquidity voids are larger-scale areas where the market moved so fast that few or no trades occurred.
In simple terms, FVGs are the cracks in price. Liquidity voids are the chasms.
How and When Do Fair Value Gaps Form?
Key Market Events That Trigger Gaps
Fair Value Gaps don’t just pop up like weeds in a lawn—they’re born during key market conditions, and knowing these is half the battle.
Economic Announcements
Events like NFP (Non-Farm Payrolls), CPI (Consumer Price Index), and retail sales data have the power to blow up your chart in seconds. These high-impact reports cause massive order flow imbalances, often pushing price into fast, one-sided movement that creates clean FVGs.
Traders who catch these can often ride a wave of institutional momentum—if they manage the risk properly.
Central Bank Decisions
When the Federal Reserve, ECB, or BOJ speaks, the markets listen—loudly. Interest rate decisions and policy statements cause volatility spikes that blast through price levels, leaving gaps in their wake.
These are among the most reliable times for FVGs to form, especially on the 1H, 4H, and Daily charts.
Institutional Orders and Volume Spikes
This is the smart money’s playground. When hedge funds and banks flood the market with large buy or sell orders, price rockets (or tanks) without time for proper “fair valuation.”
The result? A sweet, tradeable FVG that smaller traders can later exploit once price retraces into that zone.
Fair Value Gap vs. Other Price Concepts
FVG vs. Order Blocks
Order blocks are zones where institutional traders previously placed large buy/sell orders. They mark areas of accumulation (for longs) or distribution (for shorts). An FVG, on the other hand, reflects the impact of such orders—where price moved so fast, it didn’t fill all levels.
While both can coexist, FVGs often form just above or below an order block. Advanced traders use both: the order block as the intent, the FVG as the execution opportunity.
FVG vs. Imbalances
Imbalance is a broader term for when there’s more aggressive buying than selling (or vice versa). But not all imbalances create visible FVGs. FVGs are measurable. Imbalances can be subtle, whereas FVGs practically wave at you from the chart.
FVG vs. Liquidity Voids
Liquidity voids are dramatic versions of FVGs. They’re large, sudden price surges or drops with little to no trading activity. Think “gap on steroids.” They’re rare in Forex but tend to appear during extreme news or flash crashes.
FVG vs. Traditional Price Gaps
Let’s compare with classic price gaps from equities:
Breakaway Gaps
Occur at trend starts after consolidation. Strong directional intent. Some FVGs can mimic breakaway behavior.
Exhaustion Gaps
Appear at the end of a trend—suggesting it’s running out of steam. Often get filled quickly.
Common Gaps
They appear for no significant reason, usually fill within a day or two. FVGs aren’t random—they’re deliberate imbalances from powerful orders.
Algorithmic and Institutional Use of Fair Value Gaps
How Smart Money Exploits FVGs
Big institutions create FVGs on purpose. They’ll push price rapidly in one direction, creating the gap, then revisit it later to complete pending orders. Retail traders caught off guard usually get whipsawed—unless they recognize the setup.
This “liquidity hunting” is part of why you’ll often see price retrace just enough to the FVG before blasting off again.
Role of FVGs in Algorithmic Models
Quantitative strategies often identify FVGs for:
- Detecting unbalanced areas for reversion-to-mean trades
- Entering trend continuations after retrace into FVG
- Triggering limit orders based on historical FVG behavior
Tools and Indicators That Detect FVGs
Look for custom scripts or tools labeled “Fair Value Gap” or “Price Imbalance”:
- MT4/MT5 indicators that shade gaps
- TradingView scripts using 3-candle logic
- Institutional-grade tools like Bookmap can visualize gaps using volume
Advantages and Disadvantages of Using FVGs
Benefits for Technical Traders
- High-Risk Reward: Clean entries at imbalance zones
- Institutional Insight: You follow smart money logic, not just squiggly lines
- Clear Strategy: Structured setup, not vague chart patterns
- Adaptable: Works across assets and timeframes
Limitations and Risks
- False Signals: Not all gaps are respected; some become traps
- Needs Experience: Requires chart literacy and price-action skill
- No One-Size-Fits-All: Doesn’t work in every market condition
- Can Be Late: FVGs are reactive—some moves may already be gone
Common Mistakes to Avoid in FVG Trading
- Chasing gaps without confirmation: You’re not Indiana Jones—don’t leap in blindly.
- Using FVGs standalone: Always combine with context—trend, support/resistance, and session timing.
- Forcing trades: If the gap isn’t clean, or price already filled it twice, leave it.
- Overleverage: Don’t bet the farm. FVGs can fail—and fast.
- Ignoring fundamentals: Even the best gap won’t save you during a Fed rate hike.
Pro Tips for Mastering Fair Value Gap Trading
- Layer FVGs with Fibonacci retracements and daily pivots for A+ entries.
- Backtest FVGs on your preferred pair and timeframe. Patterns will emerge.
- Use alerts to monitor price retracing into key FVGs.
- Avoid overlap: If an FVG sits in a messy range, it’s less reliable.
- Think like a bank: Where would they leave unfilled orders? That’s your playground.
Conclusion: Is the Fair Value Gap Strategy Right for You?
If you’re a trader who values structure, logic, and measurable setups, FVGs are gold dust. They offer clarity in the chaos and align with how smart money actually moves markets.
But like any strategy, they’re not plug-and-play. They demand discipline, screen time, and constant refinement. Think of them as a powerful lens—not a crystal ball.
If you’re tired of trading noise, indicators that lag, or patterns that fail—Fair Value Gaps might be your secret weapon. Test it, track it, and trust the process.
FAQ
Yes, but it’s recommended to combine FVGs with strong risk management and other price action concepts.
Not always, but they often attract price, especially if they align with institutional footprints.
Yes—many traders use EAs or bots to detect and trade FVGs based on defined parameters.
The 1H and 4H are most common. For scalping, use 5–15 min. For swing trades, use Daily charts.
They work best on majors and crosses with good liquidity. Avoid illiquid or exotic pairs.
Absolutely. They often create them—knowing how retail reacts. That’s why FVG awareness gives you an edge.
