What is a Fair Value Gap (FVG)?
A Fair Value Gap (FVG)—also referred to as an Inefficiency or Single Print Imbalance—is a 3-candlestick price pattern where violent buying or selling pressure creates a pricing void. When aggressive institutional liquidity enters the interbank forex market, price moves so rapidly that only one side of the market is matched with liquidity.
Because the interbank algorithms (such as the Interbank Price Delivery Algorithm or IPDA) seek market equilibrium, price has a statistically powerful tendency to return to these imbalances to “rebalance” or re-deliver fair pricing before resuming the dominant trend.
How to Identify a Fair Value Gap on Any Chart
An FVG is measured strictly across a sequence of three consecutive candlesticks:
1. Bullish Fair Value Gap (Undersupplied Market)
- Candle 1: Preceding reference candle.
- Candle 2: Large, explosive bullish expansion candle moving violently upward.
- Candle 3: Subsequent candle following the expansion.
- The Gap: The open space between the High of Candle 1 and the Low of Candle 3. If Candle 3’s low does not touch or overlap Candle 1’s high, an active Bullish FVG exists.
2. Bearish Fair Value Gap (Over-supplied Market)
- Candle 1: Preceding reference candle.
- Candle 2: Large, explosive bearish down-candle.
- Candle 3: Subsequent following candle.
- The Gap: The empty price range between the Low of Candle 1 and the High of Candle 3.
The Anatomy of an FVG: Key Price Levels
Inside an active Fair Value Gap, institutions monitor two precise mathematical benchmarks:
- The Premium / Discount Boundary: The opening edge of the gap where price first enters the imbalance.
- Consequent Encroachment (C.E.): The exact 50% midpoint of the gap. Consequent Encroachment acts as institutional dynamic support or resistance. A clean rejection at C.E. provides high-probability confirmation that the imbalance has been satisfied.
FVG Trading Strategy Execution Framework
1. A preceding Liquidity Sweep (taking out Asian high or daily low).
2. A clean Break of Market Structure (BOS).
3. Alignment with Higher-Timeframe (H4/Daily) directional trend.
| Step | Action | Key Indicator / Visual |
|---|---|---|
| Step 1 | Establish Bias | Daily trend direction and macroeconomic calendar sentiment |
| Step 2 | Locate Displacement | H1/M15 energetic candle sequence leaving clear 3-candle gap |
| Step 3 | Set Limit Order | Limit buy/sell order at C.E. (50% midpoint) or gap edge |
| Step 4 | Stop-Loss Placement | Just beyond Candle 1 or Candle 2’s extreme wick |
| Step 5 | Take Profit Target | External liquidity pool (equal highs, equal lows, prior day high) |
Common Mistakes to Avoid
- Trading Inverted FVGs in Low Volume: Avoid trading imbalances formed during late New York or early Asian sessions where lack of interbank volume creates false readings.
- Ignoring Full Closes: If a subsequent candle closes with a full candle body completely beyond the opposite side of the gap, the FVG is invalidated and acts as an “Inversion Fair Value Gap”.