In a strong move, the middle candle can be so large that, in a rally, the high of the first candle and the low of the third leave a gap where price traded in only one direction. Price-action traders call this a fair value gap or imbalance. The idea is that price often returns to fill part or all of it before continuing.
Example
On the one-hour chart, candle one's high is $3,020, candle two rallies from $3,015 to $3,090 and candle three's low is $3,050. The area between $3,020 and $3,050 is a bullish FVG. A trader places a buy limit at $3,045, inside the gap, with a stop at $2,995, below the start of the move.
Why it matters
FVGs mark zones where price moved too fast for much two-way trading, and these zones can act as areas of interest on a pullback. Combined with market structure, they give defined entry zones and invalidation levels.
Common mistake
Expecting every gap to fill and fading strong trends because of it. In powerful moves, many gaps stay open for a long time. Use FVGs in the direction of the higher-timeframe trend, and test the rules on your own data.
FAQ
- Do fair value gaps always get filled?
- No. Many are only partly filled or not filled at all, especially in strong trends.
- What is the difference between an FVG and an order block?
- An FVG is the gap left by the impulsive candle; an order block is the candle or zone just before the impulse. They often appear together.
- Which timeframe is best for FVGs?
- Gaps on higher timeframes tend to matter more. Many traders mark them on the four-hour or daily chart and look for entries on lower timeframes.