Fair Value Gaps (FVG)

Before getting into this, a note. I use Steve Norman’s FVG indicator, and Steve’s tools can be found here. It draws these zones automatically, and while knowing how to identify them manually still matters, in practice I’m not hand-drawing boxes every morning.

What is a fair value gap?

When price moves fast, really fast, driven by momentum or a large order hitting the market, it sometimes skips through a whole stretch of prices without pausing to trade there, and buyers and sellers never get the chance to meet each other at those levels before the market’s already moved on.

That zone is a fair value gap, and the useful thing about it is that price tends to come back and revisit it. Not always, and not on any particular schedule, but often enough that marking these zones before the session starts earns its few minutes.

How to identify one

Three candles. That’s all you need.

The middle candle is the impulsive move, with a strong body and a clear direction, and the FVG is the gap left between the high of candle 1 and the low of candle 3. In a bearish move it’s the inverse, the low of candle 1 and the high of candle 3, and that range is your zone. Draw a box around it.

Bullish FVG:

• Candle 1: initial move up, establishes the high
• Candle 2: strong impulsive bullish candle, the move that creates the gap
• Candle 3: continues upward, opening above candle 1’s high
• Zone: between the high of candle 1 and the low of candle 3

Bearish FVG:

• Candle 1: initial move down, establishes the low
• Candle 2: strong impulsive bearish candle, the move that creates the gap
• Candle 3: continues downward, opening below candle 1’s low
• Zone: between the low of candle 1 and the high of candle 3

The three levels within the zone

The zone has three candidate levels to watch: the top, the midpoint, and the bottom. Price doesn’t always react at the same one, so watching what it does when it arrives matters more than placing an order blindly at any fixed point.

The midpoint shows up as a reaction area with some regularity. Whether that’s coincidence or something more structural is a question for people with more time for theory, but the practical observation is that it holds up often enough to mark.

What to look for when price enters the zone

This is where most FVG guides stop short: “watch for price to react” isn’t much use without knowing what a reaction looks like.

The aim is to find a setup, evidence that the level is being respected before committing to a trade, and that can be a single candle setup or a two to three candle sequence that collectively forms a rejection. What looks like a multi-candle rejection on a one minute chart often reads as a single candle on a three minute chart, and both are valid.

Pin bar A candle with a long wick into the level and a small body closing away from it. The wick shows the level was tested, and the body shows it was rejected. A bullish pin has a long lower wick testing the zone and closes back up, while a bearish pin has a long upper wick and closes back down.

Inside bar The previous candle tests the FVG level, then an inside bar forms entirely within its range, showing compression and indecision at the level. The break of the inside bar in the expected direction is the trigger.

Engulfing candle The previous candle touches the level, then the next candle completely engulfs it and closes strongly away, and the engulf is the confirmation that the level held.

Candle gap at the level Occasionally price gaps open exactly at the zone top, midpoint, or bottom, which is two forms of imbalance aligning at the same area, and when it occurs it adds weight to the zone.

These setups are not named to make them sound more significant than they are. A pin bar at an FVG level in empty air is not a compelling trade, but the same setup at an FVG that also sits at a previous support level, a session open, or a higher timeframe target is a different proposition.

Confluence is the real edge

An FVG on its own is a zone to watch. An FVG that aligns with something else is a zone to trade, whether that’s a supply or demand zone, a session level, a previous area of structure, or a higher timeframe target.

The zone tells you where, the price action tells you when, and something else pointing at the same area tells you whether the risk is one to take.

Key takeaways

• Three candles: the gap between candle 1’s high and candle 3’s low (bullish) or candle 1’s low and candle 3’s high (bearish)
• Mark the zone as a box and mark the midpoint as a dashed line
• Zone top, midpoint, and bottom are all candidate reaction levels
• Wait for a setup at the level: pin bar, inside bar, engulfing candle, or candle gap
• A multi-candle rejection on a lower timeframe reads as a single candle setup on a higher one, and both are valid
• FVG plus confluence is a trade; FVG alone is just a watch

Nothing on this page is financial advice. Trade your own account, manage your own risk.

See also: Tools — indicators that help with this on a live chart.

Nothing on this page is financial advice. Trade your own account, manage your own risk.