A Fair Value Gap is one of the most commonly mentioned concepts in SMC trading. It is also one of the most commonly misunderstood. Not every gap on a chart qualifies. Not every gap that qualifies is worth trading.
A Fair Value Gap (FVG) is a three-candle formation where the move of the middle candle is so strong that the wicks of the first and third candles do not overlap. The gap between the first candle's wick and the third candle's wick is the FVG zone. It represents a range of prices that were skipped in the move, where no transactions occurred.
In a bullish FVG: the high of candle 1 is below the low of candle 3. The middle candle is a strong bullish candle. The gap zone is between the high of candle 1 and the low of candle 3.
In a bearish FVG: the low of candle 1 is above the high of candle 3. The middle candle is a strong bearish candle. The gap zone is between the low of candle 1 and the high of candle 3.
Price has a tendency to return to these zones. The logic is straightforward: during a strong displacement move, many participants who were on the wrong side of the move did not get their orders filled at fair prices. When price returns to the gap zone, those participants, and new participants who missed the initial move, place orders in that zone. This creates a meaningful concentration of order flow.
Not all FVGs have the same significance. The ones that carry weight in the SMC framework share two characteristics. First, they form after a change of character or a break of structure, meaning they are part of a displacement move that already showed institutional order flow. Second, they sit within the premium or discount zone relative to the current swing range.
FVGs that form during choppy price action with no structural context, or that have already been filled once (price returned and traded through the zone), carry significantly less weight. A filled FVG is not a reason to enter.
Mark the FVG zone on the chart. Wait for price to return to the zone. Look for confirmation: a rejection candle, a wick sweep of the zone's midpoint followed by a close in the opposite direction, or a change of character on a lower timeframe within the zone. The stop goes below the FVG zone low on a long (above the zone high on a short). The target is the next structural level in the direction of the original displacement.
The FVG is the zone of interest. The confirmation is your entry signal. Do not enter on the zone alone. Wait for price to show you what it intends to do when it gets there.
Educational content only. Nothing on this site constitutes investment advice or a recommendation to buy or sell any security. Trading involves risk of loss.