Fair Value Gaps (FVG)

Before getting into this, a note. I use Steve Norman’s FVG indicator — Steve’s tools can be found here. It draws these zones automatically. Knowing how to identify them manually is still worth understanding — but in practice I’m not hand-drawing boxes every morning.

What is a fair value gap?

When price moves fast — really fast, driven by momentum or a large order hitting the market — it sometimes skips through a zone without properly trading there. Buyers and sellers didn’t get a chance to interact at those prices. The market moved on before they could.

That zone is a fair value gap. And the useful thing about it — the thing that makes it worth marking — is that price tends to come back and revisit it. Not always. Not on any particular schedule. But often enough that knowing where these zones are before the session starts is worth the few minutes it takes to look.

How to identify one

Three candles. That’s all you need.

The middle candle is the impulsive move — strong body, clear direction. The FVG is the gap left between the high of candle 1 and the low of candle 3. In a bearish move it’s the inverse — the low of candle 1 and the high of candle 3. That range is your zone. Draw a box around it.

Bullish FVG:

• Candle 1: initial move up, establishes the high
• Candle 2: strong impulsive bullish candle — the move that creates the gap
• Candle 3: continues upward, opening above candle 1’s high
• Zone: between the high of candle 1 and the low of candle 3

Bearish FVG:

• Candle 1: initial move down, establishes the low
• Candle 2: strong impulsive bearish candle — the move that creates the gap
• Candle 3: continues downward, opening below candle 1’s low
• Zone: between the low of candle 1 and the high of candle 3

The three levels within the zone

The zone has three candidate levels worth watching: the top, the midpoint, and the bottom. Price doesn’t always react at the same level — which is why watching what it does when it arrives matters more than placing an order blindly at any fixed point.

The midpoint shows up as a reaction area with some regularity. Whether that’s coincidence or something more structural is a question for people with more time for theory. The practical observation is that it’s worth marking.

What to look for when price enters the zone

This is where most FVG guides stop short. “Watch for price to react” isn’t much use without knowing what a reaction actually looks like.

The aim is to find a setup — evidence that the level is being respected before committing to a trade. That can be a single candle setup or a two to three candle sequence that collectively forms a rejection. What looks like a multi-candle rejection on a one minute chart often reads as a single candle on a three minute chart. Both are valid.

Pin bar A candle with a long wick into the level and a small body closing away from it. The wick shows the level was tested. The body shows it was rejected. A bullish pin has a long lower wick testing the zone and closes back up. A bearish pin has a long upper wick and closes back down.

Inside bar The previous candle tests the FVG level, then an inside bar forms entirely within its range. Compression and indecision at the level. The break of the inside bar in the expected direction is the trigger.

Engulfing candle Previous candle touches the level. Next candle completely engulfs it and closes strongly away. The engulf is the confirmation that the level held.

Candle gap at the level Occasionally price gaps open exactly at the zone top, midpoint, or bottom. Two forms of imbalance aligning at the same area. Worth noting when it occurs — it adds weight to the zone.

These setups are not named to make them sound more significant than they are. A pin bar at an FVG level in empty air is not a compelling trade. The same setup at an FVG that also sits at a previous support level, a session open, or a higher timeframe target is a different proposition entirely.

Confluence is the real edge

An FVG on its own is a zone worth watching. An FVG that aligns with something else — a supply or demand zone, a session level, a previous area of structure, a higher timeframe target — is worth trading.

The zone tells you where. The price action tells you when. Something else pointing at the same area tells you whether it is worth the risk.

Key takeaways

• Three candles — the gap between candle 1’s high and candle 3’s low (bullish) or candle 1’s low and candle 3’s high (bearish)
• Mark the zone as a box and mark the midpoint as a dashed line
• Zone top, midpoint, and bottom are all candidate reaction levels
• Wait for a setup at the level — pin bar, inside bar, engulfing candle, or candle gap
• A multi-candle rejection on a lower timeframe reads as a single candle setup on a higher one — both are valid
• FVG plus confluence is worth trading; FVG alone is worth watching

Nothing on this page is financial advice. Trade your own account, manage your own risk.

See also: Tools — indicators that help with this on a live chart.

Nothing on this page is financial advice. Trade your own account, manage your own risk.