What is a fair value gap (FVG), and how do you trade it?
The fair value gap (FVG) is one of the most popular ideas in smart money trading, and one of the most misused. Used properly, it gives you a precise, low-risk place to join a strong move. Used carelessly, it's just another box on the chart. Here's how to tell the difference.
What is a fair value gap?
When price moves very quickly in one direction (a displacement), trading becomes one-sided for a moment. Buyers or sellers overwhelm the other side, and price skips through a zone where little two-way trading happened. That zone is the fair value gap.
You find it with three candles:
- Bullish FVG: the gap between candle 1's high and candle 3's low, when they don't overlap.
- Bearish FVG: the gap between candle 1's low and candle 3's high.
Candle 2 is the big displacement candle that created the gap.
Why does price come back to the gap?
Price that moved too fast often returns to rebalance: orders that couldn't be filled during the displacement get filled on the way back. That's why the first return to a fresh FVG is often a good place to join the move, especially when it's in line with the bigger trend.
How to trade a fair value gap, step by step
- Start with bias. Use the H4 or daily structure. Only take bullish FVGs in an uptrend and bearish ones in a downtrend.
- Look for displacement with a break of structure. The best gaps form when the fast move also breaks the last swing. A gap in the middle of a range means little.
- Mark the gap from candle 1 to candle 3 and note its midpoint.
- Wait for the first return. Place a limit order at the midpoint (or the top edge of a bullish gap if you want more fills and accept a wider stop).
- Stop beyond the gap candle. If price trades back through the whole move, the idea is wrong.
- Target the swing that started the move, then the next pool of liquidity. Aim for at least 1:2.
Common mistakes with FVGs
- Trading every gap. On a five-minute chart there are dozens a day. Only gaps with displacement, structure and bias behind them are worth anything.
- Ignoring where the gap sits. A bullish FVG in the discount half of a move (below its 50%) is far better value than one near the top.
- Moving the stop into the gap. Price often wicks deep into the gap before turning. Give it room, and size the trade so that room costs exactly 1R (see how to calculate lot size).
FVGs and other smart money tools
A fair value gap is strongest as part of a sequence: a liquidity sweep against your bias, a CISD or break of structure back with it, then an entry in the FVG that shift created. An FVG that overlaps an order block is stronger still.
Find out whether FVGs actually work for you
The Trader’s Ledger has FVG as a setup card, so every gap you trade is logged under it and the Performance tab shows your real win rate and average R. £19, one payment, with a free 49-page trading course.
Get The Trader’s LedgerOn MetaTrader, TTL Smart Money Pro marks fair value gaps in the direction of your higher-timeframe bias, with entry, stop and target drawn.
Frequently asked questions
What is a fair value gap in trading?
A fair value gap is a price zone left behind by a fast, one-sided move. In a three-candle sequence it's the gap between candle 1's high and candle 3's low (bullish) or candle 1's low and candle 3's high (bearish).
Do fair value gaps always get filled?
No. Many are filled, but not all, and a gap against the trend can be ignored completely. Trade gaps in the direction of the higher-timeframe trend and accept that some never come back.
What timeframe is best for fair value gaps?
Mark your bias on H4 or daily, then look for gaps on M5 to H1. Gaps on higher timeframes are more meaningful but less frequent.
Where should the stop go on an FVG trade?
Beyond the candle that created the gap, so a full reversal of the displacement takes you out.
Educational content only, not financial advice. Trading carries a high level of risk and you can lose more than you expect. Examples use illustrative prices.