In this article you will learn:

• What is the Fair Value Gap (FVG); 
• How to spot the Fair Value Gap on the chart; 
• How to trade it. 

What is the Fair Value Gap

The Fair Value Gap typically forms when there’s a significant imbalance between buyers and sellers, leading to sharp, impulsive price movements.

These impulses often create zones that can be either bullish or bearish, highlighting the temporary market imbalance.

The Fair Value Gap concept is based on the idea that the market tends to fill these price gaps over time. They are not sustainable in the long term, so the price often pulls back to these gaps before continuing in the main trend direction.

The Fair Value Gap (FVG) can be a helpful signal for spotting potential entry zones. This gap forms during a strong price move that leaves a space between the high of the first candle and the low of the third candle in a three-candle sequence. That’s where the market shows an imbalance.

Imagine a bearish trend: the low of the first candle and the high of the third candle create a gap that the market often “wants” to fill. This gives traders a chance to position themselves as the price retraces to that gap or to follow the main trend direction as it bounces off this level.

How to spot the Fair Value Gap on the chart

Identifying FVG can be confusing at first, but it gets easier with a little practice. The key is to find a three-candlestick formation that leaves a gap between the highs and lows of the first and third candles.

Here's how to do it: 

• Find an impulsive candle: First, look for a strong candle with a substantial body - ideally covering about 70% of the candle’s height (see Photo 1);

• Check the neighboring candles: Once you’ve spotted the large candle, check the candles immediately before and after it. These neighboring candles shouldn’t fully overlap with the large one. Any gap between the highs and lows of these candles signals a Fair Value Gap (see Photo 2).;

• Mark out the empty space: In an uptrend, the Fair Value Gap is the price space between the highest point of the first candle and the lowest point of the third candle. In a downtrend, this is reversed. This gap represents a potential trading opportunity. For example, in the 15-minute EUR/USD chart, a large upward candle appears between two smaller candles, leaving a gap. This signals an entry point for traders (see Photo 3).

How to trade the Fair Value Gap

It’s time to understand how to enter a trade using this model. First, identify the trend and the areas of supply and demand. When you spot a Fair Value Gap, mark your entry point. Then, set your stop-loss and target levels.

• Identify the trend: Recognizing the trend is essential. In an uptrend, where the market makes higher highs and higher lows, look for buying opportunities. In a downtrend, where prices create lower highs and lower lows, focus on selling. You can use higher time frames, like hourly or daily charts, to confirm the overall trend direction. Tools like trend lines and channels can also help (see Photo 4);

• Mark out your Supply & Demand zones: Once you’ve identified the trend, look for supply and demand zones that align with it. In an uptrend, watch for demand zones where buying interest is high. In a downtrend, focus on supply zones where selling pressure is strong (see Photo 5);

• Use the FVG as your entry points: After you find a Fair Value Gap (which can appear on a lower time frame), use it to identify your entry point. For instance, in a downtrend, when the price fills the gap, you can enter a sell position (see Photo 6);

• Determine the SL and TP levels: Risk management is crucial when trading with FVG. Set your stop-loss above the supply zone or above the first candle in the FVG formation to minimize losses if the market moves against you. Your take profit should be near the next demand zone to secure your gains. However, if you notice a strong trend that suggests potential breakouts at key levels, you can let the position run (see Photo 7).

Trading FVG from predefined zones (especially on smaller time frames) involves placing pending orders. Learn how to use these orders in this article:

The Fair Value Gap strategy offers a favorable risk-to-reward ratio, allowing you to take advantage of market pullbacks while using key zones and levels as protective measures.

This type of strategy is well-suited for those of you who are already familiar with identifying trends and recognizing supply and demand zones.

If you're just starting out in trading, the best option for you is to check out our completely free beginner's course: