Fair Value Gap: The Imbalance That Wants To Fill

A fair value gap is a three candle sequence where price moved so fast that no candle wicks overlapped in the middle. The middle candle's body left empty space between the wick of the candle before and the wick of the candle after. That empty space is the imbalance.

The thesis: price tends to revisit those gaps because the market did not transact thoroughly in that zone. Buyers and sellers will return to the level to fill the imbalance. Then the trend can continue.

How To Identify A Bullish FVG

• Three consecutive bullish candles.
• The high of candle one is below the low of candle three.
• The space between candle one's high and candle three's low is the bullish fair value gap.
• The middle candle covered the gap with a large body.

How To Identify A Bearish FVG

• Three consecutive bearish candles.
• The low of candle one is above the high of candle three.
• The space between is the bearish fair value gap.
• Middle candle traversed the gap with a large body to the downside.

Why Gaps Fill

When the market moves too fast, not every level gets fair transaction. Limit orders that wanted to buy or sell in that range got skipped over. Those orders sit in the order book waiting for price to return.

When price comes back, it triggers those resting orders. The level transacts. The gap fills. Then the original direction often continues.

The Entry

I do not enter at the edge of a gap on a limit order. I wait for price to enter the gap and show reversal signs. Reversal candle inside the gap zone. Hammer or shooting star. Failed attempt to push through with rejection wick.

The entry is the close of the confirmation candle. Stop on the far side of the gap. Target back in the direction of the original trend.

Trading With The Trend

Bullish fair value gaps work best as long entries in uptrends. The trend retraces to fill the gap. Buyers step in. The trend resumes.

Trading bullish FVGs as short entries in downtrends does not work. The gap fills but no reversal follows. Counter trend gap trades have lower probability.

The Stop

Stop just beyond the far side of the gap. For a bullish FVG used as a long entry, stop below the low of the gap. For a bearish FVG used as a short entry, stop above the high of the gap.

If price closes through the entire gap and continues, the level failed. The thesis is broken. Get out.

The Target

First target is the swing high or low that created the gap. After a bullish FVG fills and confirms, target the swing high that preceded it. Often new highs follow.

I take partial profit at the prior swing. Trail the rest if the trend continues. Sometimes a single gap fill leads to a multi day or multi week extension.

Timeframe Selection

Daily and four hour FVGs are the most reliable. Hourly FVGs work for swing traders. Five minute and one minute FVGs are noise. The gap concept needs a higher timeframe for real significance.

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