Fair Value Gap (FVG)

Also: FVG · Fair Value Gap · Imbalance

Definition

A Fair Value Gap is a three-candle formation where the wick of candle 1 and the wick of candle 3 do not overlap, leaving a price range in candle 2 that was traversed with inefficiency. The algorithm marks this gap as a level price is likely to revisit to "rebalance" the delivery.

Key characteristics

• Three-candle pattern — the gap is the range between candle 1 high (bullish) or low (bearish) and candle 3 low/high
• Represents inefficient, one-sided price delivery
• Often created during [[Displacement]]
• Price typically returns to the gap to fill or partially fill it
• Midpoint of the gap is the [[Consequent Encroachment]] (CE) level — preferable for bodies to respect, but NOT a hard boundary
• A smaller gap (≤5 points on NQ 1m) is more surgical than a large one
• HARD INVALIDATION — for a Premium/SIBI (bearish) FVG, bodies closing above the gap high ends the trade. For a Discount/BISI (bullish) FVG, bodies closing below the gap low ends the trade. CE is preferable, not required.
• WICKS VS BODIES — wicks do the damage, bodies tell the story. Wicks can violate the FVG freely. Only body closes are diagnostic.
• BODY-PLACEMENT GRADIENT (Premium/SIBI/bearish FVG): BEST = bodies at the LOW of the gap and react away. GREAT = bodies at CE and move away. ACCEPTABLE = bodies past CE but still inside the gap (wicks may have done damage). Inverse for Discount/BISI.
• FULL-CLOSURE RULE — if price reaches the far edge of the FVG (full closure: high of a SIBI, low of a BISI), demand immediate rejection. Quick movement away. No quick rejection = level is dead.
• TIME-IN-GAP is the quality tell — extended candles inside the gap signals low-probability fill. Heavy candle-to-candle overlap inside the gap is the same signal.

How it forms

During [[Displacement]] — a sharp directional move — the algorithm delivers price so aggressively that it leaves a vertical range where no two-sided trading occurred. Because the algorithm values balance, this inefficiency becomes a magnet. Price later retraces into the gap as a standard delivery mechanism before continuing in the direction of displacement.

How to use

Wait for [[Displacement]] that breaks structure. Mark the FVG formed inside that displacement leg. Enter on a limit order at the gap — often at or just beyond [[Consequent Encroachment]] (CE / midpoint). Stop beyond the far edge of the gap or beyond the origin of displacement. Target the next PD array — opposing liquidity pool, order block, or range extreme.

PREMIUM / SIBI DISCIPLINE — When using a Premium / SIBI / bearish FVG (expect price to reject and continue down): the HARD INVALIDATION is bodies closing above the FVG high — that ends the trade. Inside the gap, the body-placement gradient is — BEST: bodies close right at the LOW of the FVG and react away. GREAT: bodies close right at Consequent Encroachment (CE — the midpoint) and move away. ACCEPTABLE: bodies close past CE (between CE and the high), wicks may have done damage, but bodies stay inside the gap. Wicks can violate freely — wicks do the damage, bodies tell the story. CE-respect is preferable, not required; the only required boundary is the gap high.

DISCOUNT / BISI DISCIPLINE — When using a Discount / BISI / bullish FVG (expect price to reject and continue up): the HARD INVALIDATION is bodies closing below the FVG low — that ends the trade. Inside the gap, the body-placement gradient is — BEST: bodies close right at the HIGH of the FVG and react away. GREAT: bodies close right at Consequent Encroachment (CE — the midpoint) and move away. ACCEPTABLE: bodies close past CE (between CE and the low), wicks may have done damage, but bodies stay inside the gap. Wicks can violate freely — wicks do the damage, bodies tell the story. CE-respect is preferable, not required; the only required boundary is the gap low.

FULL-CLOSURE RULE — if price trades to full FVG closure (bodies reach the far edge: the high of a Premium/SIBI gap or the low of a Discount/BISI gap), the level is on its last chance. Demand immediate rejection. Quick price action away. An immediate rebalance. If movement away is not immediate, the level is dead even though it has not technically closed outside. This is the tell that the algorithm is no longer respecting the inefficiency.

TIME-IN-GAP is the quality tell. If price spends extended candles parked inside the FVG, the level is high-resistance and low-probability — institutional respect is absent. Heavy overlap between consecutive candles inside the gap (each new candle sitting deep inside the previous one's range) is the same signal: the algorithm is not honoring the level cleanly. The cleanest FVG fills are decisive — wick in, body close on the correct side, displacement away.

Common mistakes

• Trading every FVG instead of only those aligned with [[Displacement]] and HTF bias
• Treating CE as a hard invalidation — CE-respect is preferable, not required. The hard boundary is the FVG edge (high for Premium/SIBI, low for Discount/BISI).
• Reading wicks instead of bodies — wicks can violate freely. Only body closes signal validity.
• Using FVGs in consolidating price action where no displacement is present
• Holding a Premium/SIBI trade after bodies close above the gap high — that is invalidation, not noise
• Holding a Discount/BISI trade after bodies close below the gap low — that is invalidation, not noise
• Holding through full FVG closure without seeing immediate rejection — at full closure, the level demands quick movement away. No movement = dead level.
• Ignoring time-in-gap — when price camps inside the FVG, it is signaling resistance to filling cleanly. The longer it sits, the lower the probability.
• Trading an FVG where consecutive candles heavily overlap inside the gap — that overlap is the algorithm's tell that the level lacks institutional respect.

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