What is a fair value gap in trading?

Look at any three candles in a row. Normally the wick of candle 3 overlaps the wick of candle 1, because price trades back and forth. When candle 2 is a large, fast candle, candle 3 can open and trade entirely beyond candle 1’s range. The empty band between candle 1’s wick and candle 3’s wick is the fair value gap.

The story behind the name: during candle 2 one side was in such a hurry that the other side barely traded, so price may have moved past what both sides would accept as fair. SMC teachers expect price to come back into the gap later to trade there in both directions. That is a working story, not something you can see on a chart, and there is no public evidence that large institutions use the term or trade around these bands.

What you can see is speed: an FVG marks a candle that covered a lot of ground with little overlap. That speed is why many traders read a fresh gap as a footprint of strong buying or selling, and why the gap often sits next to an order block, the last opposite candle before the same move.

Fair value gap (FVG)
A three-candle pattern in which the wicks of candles 1 and 3 do not overlap, leaving a band that traded only during candle 2.
Imbalance
The SMC name for one-sided trading, where buyers or sellers dominated so strongly that price moved without much two-way trade. An FVG is the most common way to draw it.
Displacement
A fast, large-bodied move in one direction, usually one to three candles, that leaves a gap behind and often breaks market structure.
Midpoint (consequent encroachment)
The 50% level of the gap, halfway between its two edges. Some traders treat a close beyond it as a sign the gap is weakening.
Fill (mitigation)
Price returning into the gap. A full fill trades through the whole band; a partial fill only reaches part of it.
Inversion FVG
A gap that price closed straight through, which some traders then watch from the other side, so a failed bullish gap is treated as possible resistance.

Bullish vs bearish FVG

A bullish FVG forms in a rise: candle 2 is a big green candle, and the low of candle 3 stays above the high of candle 1. The gap runs from candle 1’s high (bottom edge) up to candle 3’s low (top edge). Traders look for buying interest when price dips back into it.

A bearish FVG is the mirror image in a drop: candle 2 is a big red candle, and the high of candle 3 stays below the low of candle 1. The gap runs from candle 3’s high up to candle 1’s low, and traders watch for selling when price rallies back into it.

Only wicks count. Two candles whose bodies leave a space but whose wicks overlap have no fair value gap. Some traders also mark a smaller "volume imbalance", a space between two candle bodies only, but that is a separate idea and this guide does not use it.

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Two panels. Left: a bullish FVG, three candles with a big green candle 2, and a green band between the candle 1 high and the candle 3 low; note: candle 3 low stays above candle 1 high. Right: a bearish FVG, three candles with a big red candle 2, and a red band between the candle 3 high and the candle 1 low; note: candle 3 high stays below candle 1 low.

How to find and draw an FVG on TradingView

You can mark gaps by eye in a few seconds once you know what to look for. Work from the top down, as in multi-timeframe analysis: gaps on the 1-hour or 4-hour chart frame the day, and gaps on the 5- or 15-minute chart time the entry.

Community scripts on TradingView can shade gaps automatically. Check their settings: most filter out small gaps by size, and a gap is only confirmed when candle 3 closes, so a box can appear and disappear while candle 3 is still forming. The repainting guide explains why that matters.

  1. Find a large candle that moved fast, then look at the candle before it (candle 1) and the candle after it (candle 3).
  2. Bullish check: is the low of candle 3 above the high of candle 1? Bearish check: is the high of candle 3 below the low of candle 1? If not, there is no gap.
  3. Wait for candle 3 to close. Until then the gap is not confirmed.
  4. With the Rectangle tool, draw from candle 1’s wick to candle 3’s wick, and turn on Extend right in the box settings so the gap carries forward.
  5. Add a horizontal line at the midpoint: (top edge + bottom edge) ÷ 2.
  6. Note the timeframe on the box, and delete it once a candle closes through the far edge.

Do fair value gaps always fill?

No. Popular videos often say that price must return to fill every gap; it does not. Some gaps are filled completely, some only partly, and some are never revisited at all, especially in a strong trend. And some fill only on the way to a much deeper move, which is the case that costs money.

The drawing below shows the three outcomes for the same gap. In the first, price trades through the whole band and then rises: the gap filled, and anyone who bought its top edge sat through a full test. In the second, price touches the 50% line and turns up, the reaction many FVG traders hope for. In the third, a candle closes below the bottom edge: the bullish idea is wrong, and the stop should already be there.

A gap that has been run through is no longer a buy zone. Some traders then watch it from the other side as an inversion FVG, possible resistance on a rally back. Treat that like any other zone: a place to watch, not a reason to trade.

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Three panels with the same bullish gap and a dashed 50% line. Filled: price trades through the whole gap, then rises. Half filled: price tags the 50% line, then rises. Run through: a candle closes below the gap, circled in red, with the note closed below the gap: idea wrong.

Which FVGs matter: context over count

A busy chart can show a dozen gaps a day, and most of them mean little. Traders who use FVGs usually rank them with a few questions, and skip any gap that fails more than one:

  • Did the move that left the gap break market structure, closing beyond the last swing high or low? A gap created by a break of structure says more than one in the middle of a range.
  • Does it point with the higher-timeframe trend? Bullish gaps in an uptrend, bearish gaps in a downtrend.
  • Is it fresh? The first return to a gap is usually watched most closely; a gap price has already traded through is used up.
  • Is it next to other evidence, such as an order block, a supply or demand zone or a prior day’s high or low?
  • Is it a sensible size? A gap far smaller than the average true range is noise; a huge one makes the stop too wide to trade.
  • Is there room to the next level, so the target pays at least twice the risk?

How to trade a fair value gap, step by step

An FVG gives you a location. The plan below adds the parts that matter more: direction, confirmation, a stop and a size. Write each price down before price reaches the gap.

Some traders place a limit order at the gap’s near edge or its midpoint instead of waiting for a candle. That gets a better price but also buys every gap that fails. Waiting for a closed candle costs some missed trades and filters out many that slice straight through.

  1. Mark the higher-timeframe trend and trade only gaps in its direction.
  2. Find a fresh gap left by displacement that broke structure, and draw its edges and midpoint.
  3. Wait for price to come back into the gap. Do not chase the move that created it.
  4. Look for a closed candle in your direction from inside the gap, such as a candle that dips into it and closes back up.
  5. Put the stop beyond the far edge of the gap (or beyond candle 1’s wick, for a wider stop), where the idea is wrong.
  6. Set the target before the next level: the high that the move made, or the next opposite zone.
  7. Size the position from the stop, then check that the reward is at least twice the risk; if it is not, skip it.

Worked example: a long from a bullish FVG (hypothetical)

Hypothetical, on the 15-minute chart of a liquid stock whose 1-hour trend is up. A green candle 2 runs from $47.10 to $48.50 and closes above the morning swing high of $48.20, a break of structure. Candle 1’s high was $47.20 and candle 3’s low is $47.80, so the bullish FVG runs from $47.20 to $47.80, with its midpoint at $47.50.

You do not buy the breakout. Price drifts back over the next few candles, and one 15-minute candle dips to $47.45, just below the midpoint, then closes back up at $47.70. That is the confirmation, and you buy at $47.70, as the drawing below shows.

The failure, same setup on another day: the confirmation candle prints, you buy at $47.70, and twenty minutes later a candle closes at $47.05, below the gap. The stop fills at $47.10, or a few cents lower in a fast market: a loss of about $99.60 plus slippage, −1R. The gap was simply run through, and nothing about the chart beforehand said it would be.

A quieter failure: price never comes back to the gap and runs to $49.00 without you. Buying late at $48.60 with the same stop would risk $1.50 to make $0.30. Let it go; a missed trade costs nothing.

  • Entry: $47.70, after a closed candle back up inside the gap.
  • Stop: $47.10, just under the gap’s bottom edge at $47.20. Risk: $0.60 a share.
  • Target: $48.90, just under the impulse high of $48.95, the next level. Reward: $1.20, a 1:2 risk-reward ratio.
  • Size: a $20,000 account risking 0.5% accepts a $100 loss. $100 ÷ $0.60 = 166 shares, rounded down, about $7,920 of stock. The position size calculator does this math.
  • Result at the target: 166 × $1.20 = $199.20, about +2R. Result at the stop: 166 × $0.60 = $99.60, −1R, plus costs.

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A trade plan on a 15-minute candle chart: a green FVG band from 47.20 to 47.80, a candle that dips into it and closes back up with a buy triangle, an entry line at 47.70, a dotted stop line at 47.10 below the gap and a dashed target line at 48.90, each with a price tag.

Common fair value gap mistakes

Most FVG losses come from treating the gap as a signal on its own:

  • Trading every gap. Gaps form all day on low timeframes; without structure, trend and location, a gap is just a fast candle.
  • Believing gaps must fill. Many never come back, and the ones that do can keep going. "Price always returns" is a story, not a rule.
  • Counting gaps before candle 3 closes. Until the close, the gap can shrink or vanish.
  • Confusing an FVG with an overnight gap. The space between yesterday’s close and today’s open is a different thing, covered in the gap trading strategy guide.
  • Putting the stop inside the gap. If price closes through the far edge, the idea is wrong; a stop in the middle gets hit by ordinary noise.
  • Ignoring news and the open. Gaps around the 9:30 a.m. ET open or a data release get run through more easily, because volatility is highest then.