What Is a Fair Value Gap? Meaning, Strategy & Trading Use

Fair value gap' refers to a price imbalance that appears on a chart when buying and selling activity does not match within a short time. In trading, this gap forms when the price moves sharply in one direction, leaving an area where very little trading takes place. Traders watch these zones because prices often return to fill the imbalance before continuing their move. A fair value gap typically appears within a three-candle sequence. It reflects temporary inefficiency between demand and supply. Many traders mark these areas to study potential entry points, retracement zones, or continuation setups. This article explains what is fair value gap. 

How Does a Fair Value Gap Form? 

The FVG in trading usually develops through a clear three-candle structure. Understanding this formation helps traders recognise imbalance zones quickly. 

1. First Candle Establishes Direction 
   The first candle reflects relatively balanced market activity, where buying and selling pressure remain stable and price trades normally without sharp expansion. 
2. Second Candle Shows Strong Momentum 
   A large impulsive candle appears, pushing the price sharply upward or downward with minimal overlap. 
3. Third candle fails to fully overlap 
   The third candle forms after the impulsive move. However, its wick does not completely overlap the wick of the first candle. This lack of overlap leaves an untraded price region between the two candles. 
4. Imbalance zone becomes clearly visible 
   The space between the first candle’s wick and the third candle’s wick marks the fair value gap. Traders usually highlight this zone on the chart for future observation. 
5. Market often returns to rebalance orders 
   Because some orders remain unfilled, prices frequently revisit this area later. The revisit may lead to either continuation or temporary reaction depending on the market context. 

Types of Fair Value Gaps 

After understanding FVG meaning and how it forms, let’s understand its types. Fair value gaps can appear in multiple directional contexts. Recognising the type helps traders interpret market intent more clearly. 

1. Bullish FVG 
   A bullish fair value gap forms during strong upward momentum. The impulsive bullish candle leaves an imbalance below the current price. When price retraces into this zone, traders watch for potential buying interest and possible continuation of the upward move. 
2. Bearish FVG 
   A bearish fair value gap appears during sa harp downward movement. The strong bearish candle creates an imbalance above the current price. When price pulls back into this zone, traders monitor for selling pressure that may push price lower again. 

What Does a Fair Value Gap Indicate? 

The FVG in trading provides several useful market insights when studied carefully. 

• Liquidity Imbalance in the Market 
  The gap shows that the price moved faster than the market could match orders. This often points to temporary inefficiency between buyers and sellers. 
• Possible Retracement Behaviour |
  Price frequently returns to the gap area to rebalance the unfilled orders. This behaviour makes the zone important for monitoring pullbacks. 
• Continuation Potential After Fill 
  Once price revisits and reacts to the gap, the earlier directional move may continue. Traders often study the reaction carefully before forming expectations. 
• Presence of Strong Participation 
  Large impulsive candles that create gaps often reflect activity from institutions or high-volume participants. 
• Short-term Pricing Inefficiency 
  The gap highlights that the market skipped fair pricing within that specific range. 

How to Identify a Fair Value Gap on Charts? 

Identifying a fair value gap requires a structured and patient chart-reading approach. 

1. Identify the Charts for Strong Momentum Candles 
   Start by looking for unusually large bullish or bearish candles that stand out from recent price action. These candles often signal the start of a potential imbalance. 
2. Verify the Three-Candle Carefully 
   Confirm that the large middle candle is between two smaller candles. The structure must clearly show displacement rather than gradual movement. 
3. Check Wick Alignment  
   Compare the wick of the first candle with the wick of the third candle. If they do not overlap and leave a visible space, the gap may be valid. 
4. Mark the Untraded Price Region  
   Draw a rectangle or highlight the area between the two wicks. This visual marking helps track future price interaction with the zone. 
5. Observe How Price Behaves Near the Gap 
   Watch whether the price respects the zone, fills it completely, or moves through it quickly. The reaction provides additional context for traders. 

How to Trade Fair Value Gaps? 

Here is how one can trade fair value gaps: 

1. Entry zone 
   Traders wait for the price to return to the fair value gap instead of entering during the initial strong move, allowing for more controlled entries. 
2. Confirmation  
   Entry is typically confirmed using price action signals such as rejection candles, slowing momentum, or alignment with the broader trend. 
3. Stop-loss placement 
   Stop-loss orders are usually placed beyond the fair value gap or past a recent swing high or low to manage downside risk. 
4. Target levels 
   Targets are often set near previous highs, lows, or areas where liquidity is expected to be present. 

Fair Value Gap vs Price Gap 

The following table highlights the difference between the fair value gap and the price gap: 

Advantages and Disadvantages Fair Value Gap 

The following table covers the advantages and disadvantages of fair value gap: 

Conclusion 

A fair value gap represents a price imbalance created by rapid and aggressive market movement, where proper price discovery did not take place. Traders use fair value gaps to identify potential retracement zones, liquidity rebalancing areas, and continuation opportunities within an existing trend. By waiting for prices to revisit these imbalance zones and combining them with confirmation and risk management, traders can structure entries with clearer context rather than chasing momentum. Many traders apply these concepts using a modern stock market trading app to monitor price action efficiently.