A fair value gap (FVG), also called an imbalance, is the untraded space left behind when price moves so fast that one candle’s range does not overlap the next-but-one. Measured across three candles, it is the gap between the first candle’s high and the third candle’s low (in a bullish move) or the first candle’s low and the third candle’s high (bearish). Markets dislike inefficiency, so price is repeatedly drawn back to rebalance the gap.
Why fair value gaps get filled
A fair value gap represents an imbalance between buyers and sellers — a stretch of price where one side was completely dominant and orders on the other side went unfilled. That unfinished business acts as a magnet. When price returns to the gap, the previously starved orders finally transact, the imbalance is corrected, and price often continues in the original direction. This makes the FVG one of the most precise entry zones in smart-money trading.
FVG + order block: the confluence stack
An FVG on its own is useful; an FVG that overlaps an order block is far stronger. When both align inside the same zone, you have two independent reasons for price to react there. Add a preceding liquidity sweep and you have the full institutional sequence: grab liquidity, displace, leave an imbalance, return to fill it.
Trading the gap
- Only trade FVGs created by genuine displacement — a lazy three-candle drift is not an imbalance.
- The most reliable reaction is at the 50% of the gap (the consequent encroachment), not the far edge.
- Use higher-timeframe gaps as targets and lower-timeframe gaps as entries.
- If price closes decisively through a gap without reacting, treat it as invalidated.
Key takeaways
- An FVG is the three-candle imbalance left by fast, one-sided movement.
- Price returns to rebalance the gap, making it a precise entry zone.
- FVG + order block + prior sweep is the complete institutional sequence.
- The 50% of the gap is the highest-probability reaction point.