A fair value gap (FVG), also called an imbalance, is a three-candle pattern that highlights a quick, one-sided move. It is one of the most discussed concepts in Smart Money Concepts. This article explains how to identify one, how traders use it and where the concept has limits.
How a fair value gap is defined
Look at three consecutive candles. In a bullish move, if the high of the first candle is lower than the low of the third candle, the space between them is a bullish FVG. The middle candle is typically large and moved so quickly that the first and third candles do not overlap.
In a bearish move, the pattern is reversed: the low of the first candle is higher than the high of the third. The gap between those two prices is a bearish FVG.
Why people watch them
The common explanation is that the market moved so fast in one direction that trading was one-sided, so price may later return to rebalance that area. Because price often does revisit such areas, traders treat the gap as a zone of interest. But "often" is not "always": many gaps are never revisited, and many are traded through without any reaction.
Ways traders use gaps
- As a retracement target. After an impulsive move, watch whether price pulls back into the gap.
- As a confluence. A gap that overlaps an order block or a key level may attract more attention.
- As a measure of momentum. Several gaps in a row can show persistent strength in one direction.
A simple study process
- Mark all gaps on a chart for a single instrument and timeframe.
- Note which ones were revisited, how long it took, and what price did on revisit.
- Compare gaps formed during high-volume sessions with those formed in quiet periods.
- Compare small gaps with large ones.
You are likely to find large variation. That is a result, not a failure of method.
Partial and full fills
Price may enter a gap partway and then reverse, or fill it entirely. Traders sometimes mark the midpoint of the gap as a reference. Whether the midpoint, the edge or the full range works best for you is something to test rather than assume.
Pitfalls
Ignoring size. A very small gap is probably noise. Think about gap size relative to the average candle range.
Forgetting trend. A bullish gap inside a clear downtrend may simply be a short-lived bounce.
Over-trading. Because gaps appear constantly, trading each one is a recipe for many low-quality decisions.
Confusing with price gaps. A gap between sessions or after the weekend is a different thing, caused by a closed market. An FVG forms within continuous trading.
Important caution
No pattern removes the uncertainty in trading. Define your risk before entering, keep position size modest and accept that any single trade can lose.
This article is educational and is not investment advice.