Fair Value Gap (imbalance)

Definition

A fair value gap (FVG), also called an imbalance, is an area of inefficiency in a three-candle sequence: the stretch of price that the second, very large candle crossed, leaving a 'void' between the first and the third.

Bullish FVG: the high of candle 1 is lower than the low of candle 3. The zone between the two is the gap. Bearish FVG: the low of candle 1 is higher than the high of candle 3.

Why it matters

The hypothesis is that such a fast move left unexecuted orders, and that price tends to come back to 'fill' at least part of that area. In practice a return is often observed, but not always and not all the way.

Using the FVG

• As an entry area: wait for the return into the gap in the direction of the move (mitigation)
• As confirmation: an FVG created by the move that breaks structure strengthens the setup
• As a target: an unfilled opposite FVG is a possible magnet for price

Points of attention

• Ignore gaps that are too small relative to volatility (for example below a fraction of ATR)
• An FVG against the higher-timeframe trend carries less weight
• On some instruments spreads and broker differences change the shape of the candles: always use the same data

Exercise

• Using the three-candle rule, mark all the FVGs of the last week on M15
• Calculate how many were filled at least 50%, and how quickly
• Repeat on three different pairs: results vary a lot and show you how unstable every 'rule' is