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 in a bearish one. This framework reads the gap as a zone price has a reason to revisit: it was crossed in one direction with little trading on the way.
Why price can return to a fair value gap
The reading behind a fair value gap is an imbalance: across that stretch of price one side traded almost unopposed, and little business was done inside the gap. If orders on the other side were left unfilled, the gap is where they would still sit, which gives price a mechanical reason to come back. When it does, the zone can hold and the move resume, or price can trade straight through it: nothing obliges a gap to be filled, and a filled gap guarantees no continuation.
FVG + order block: the confluence stack
An FVG that overlaps an order block gives two independent readings pointing at the same zone. Add a preceding liquidity sweep and you have the sequence this framework looks for: a liquidity take, a displacement, an imbalance, and a return to it. Confluence narrows where to look; it does not make the reaction certain.
Trading the gap
- Only trade FVGs created by genuine displacement: measure the move — for example, a range expansion larger than ATR(14) on the timeframe you mark on, a threshold to test on your own instrument. A slow three-candle drift is not an imbalance.
- The 50% level of the gap — the consequent encroachment — is the reference line for judging the reaction, rather than the far edge.
- Use higher-timeframe gaps as targets and lower-timeframe gaps as entries.
- If a candle closes beyond the far edge of the gap without a reaction, treat the gap as invalidated.
What this model does not do
- No prediction. Price can cross a gap and keep going, without a fill or a reaction.
- No view of the orders. The imbalance is inferred from the speed of the move.
- Timeframe-dependent. An M5 gap may not exist on M15, so mark it on the timeframe you trade.
Key takeaways
- An FVG is the three-candle imbalance left by fast, one-sided movement.
- Price has a reason to revisit a gap, but nothing obliges it to fill one.
- FVG + order block + prior sweep is the sequence this framework looks for.
- The 50% level of the gap is the reference line for judging the reaction.