Fair Value Gaps: What to Know

While the Inner Circle Trader is credited with popularizing the concept of FVGs, it is important to note that he’s not the first to have identified this type of market inefficiency.

Price action traders have been using similar concepts for decades, and FVGs are just one of many tools that price action traders use to analyze the market and make trading decisions.

Here’s everything you need to know about fair value gaps (FVGs).

What is a Fair Value Gap?

Fair value gaps (FVGs) represent imbalances between buyers and sellers in the market. These imbalances, also known as inefficiencies, are displayed on charts as gaps between candles.

How to Identify a Fair Value Gap

A fair value gap (FVG) is a three-candle sequence where the first and third candlesticks do not fully overlap the body of the second candlestick.

The space between the first and third candlesticks in a fair value gap is known as the inefficiency.

Why are Fair Value Gaps Important?

Fair value gaps (FVGs) are important because they represent zones of market inefficiency, where a large number of orders were injected.

FVGs also represent new trading opportunities, especially when coupled with order blocks, as they serve as points of interest.

Additionally, FVGs can be used as entry points for trades.

When is a Fair Value Gap Invalid?

A fair value gap (FVG) is invalidated when price closes above the gap.

The circled candlesticks in the example below invalidated the fair value gap.