Smart money concepts

The fair value gap,three candles at a time.

FVG stands for fair value gap: a three-candle pattern in which the wicks of the first and third candles do not overlap, leaving a range the middle candle crossed with no two-sided trading. A bullish FVG runs from the first candle's high to the third's low. Traders watch whether price returns into it; the gap does not have to fill.

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What a fair value gap is

Take any three consecutive candles. If the third candle's low is above the first candle's high, the middle candle moved so fast that, within those three candles, there is a band of price that only traded in one direction. That band is a bullish fair value gap. The bearish version is the mirror: the third candle's high is below the first candle's low.

The term comes from the ICT vocabulary, and traders also call it an imbalance or, in the older price-action language, an inefficiency. Some use the labels BISI (buy-side imbalance, sell-side inefficiency) for a bullish gap and SIBI for a bearish one. They all describe the same three-candle geometry.

A bullish fair value gap between the first candle's high and the third candle's low, with its midpoint marked, and a later return into the gap. Illustrative schematic, not market data: no instrument, price or date is shown.

How it differs from an ordinary price gap

A classic gap is a jump between one candle's close and the next candle's open, with no trading in between - common in stocks over a weekend. A fair value gap needs no such jump. Every price inside it did trade, during the middle candle; the point is that it traded one way only. That is why FVGs appear constantly in markets that trade around the clock, where true gaps are rare.

Retracement into an FVG, and consequent encroachment

The common reading is that price often returns into a gap before continuing, and traders plan entries there. A return that touches the near edge is described as tagging the gap; one that reaches its midpoint is said to hit consequent encroachment, a term for the 50% level of the gap. Some traders enter only at the midpoint, others anywhere inside.

There is no rule that a gap must be filled. Many are never revisited, some are filled completely and then broken, and a gap that price closes through is often re-read as an inverse fair value gap with the opposite expectation attached.

Bullish and bearish FVGs side by side
	Bullish FVG	Bearish FVG
Forms in	An up-move	A down-move
Top of the gap	Third candle's low	First candle's low
Bottom of the gap	First candle's high	Third candle's high
Usually watched as	Potential support on a return from above	Potential resistance on a return from below
Considered failed when	Price closes below the bottom	Price closes above the top

How FVGs are used in a trading strategy

On their own, FVGs are too common to be selective, so a fair value gap trading strategy almost always stacks them with something else: a higher-timeframe bias, a liquidity sweep before the move that created the gap, a break of structure during it, or an order block just beneath it. The gap then becomes the entry location inside a setup defined by the other conditions.

Step by step

How to identify it

Mark gaps on closed candles only. A gap on a candle still forming can vanish before the close.

Look for a large-bodied candle that moved a long way relative to its neighbours.
Compare the candle before it with the candle after it. For a bullish gap, is the third candle's low above the first candle's high?
If so, shade the band between those two wicks. That is the fair value gap.
Mark its midpoint if you trade consequent encroachment.
Note the context: did the move that created it break structure, and did it start from a sweep of liquidity?
Set the invalidation: a close through the far side of the gap.

Worked example

The concept,walked through

A bullish FVG, described

An illustrative sequence in round numbers, described in words. It does not represent a real instrument or date.

1. Candle oneTrades between 96 and 100. Its high is 100.
2. Candle twoA strong up candle from 99 to 116.
3. Candle threeTrades between 108 and 118. Its low is 108, above candle one's high.
4. The gapThe fair value gap is 100 to 108, with a midpoint at 104.
5. The retracementPrice later falls back to 104. A trader using this model might look for a long entry here, with a stop below 100, the gap's far side.

If price closes below 100, the gap has failed, and some traders would start treating 100 to 108 as resistance. A reaction at 104 would be one observation, not proof that fair value gaps work.

Common mistakes

Where tradersgo wrong

Marking gaps on open candles

Until the third candle closes, the gap is provisional. Many disappear before the close.

Treating every gap as tradeable

On a one-minute chart, gaps form every few minutes. Without filters, you are trading noise.

Assuming gaps must fill

They do not. A trader waiting for every gap to fill will wait for some forever and sit through others as they break.

Confusing wick and body

The gap is defined by wicks, the high and low of candles one and three. Drawing it from bodies produces a different, larger zone.

Limitations

What it cannottell you

No chart concept predicts price. These are the limits worth keeping in view.

A fair value gap is a description of how fast price moved. It carries no information about the future on its own.
Because the pattern is so common, some gaps will be followed by reactions purely by chance. That makes anecdotal success easy to find and meaningless as evidence.
The idea that price 'seeks fair value' by returning to the gap is a framing, not an established market mechanism.
Gaps on different timeframes overlap and contradict each other; which one matters is a choice the trader makes, not something the chart tells you.

In an evaluation

Using it on asimulated account

FVG entries on low timeframes can be very short-term. On a GFN account the minimum hold is 2 minutes per trade, and the rule exists because very short holds tend to rely on execution conditions rather than analysis. Plan for trades that are held at least that long.

Gaps also form around scheduled news, where the middle candle is the release itself. On a simulated funded account, profits from trades opened or closed in the window around high-impact releases may be removed, so a news-candle FVG is not an entry to rely on there.

Trading rule

Can I scalp?

Short-term trading is allowed, with a 2 minutes minimum hold.

Trading rule

Can I trade the news?

Gaps created by high-impact releases fall inside the funded-stage news window.

Trading rule

Does slippage excuse a breach?

Fast moves through a gap are where fills are worst.

Questions

Asked aboutthis concept

Fair value gap. It is the ICT and SMC name for a three-candle imbalance, sometimes also called an inefficiency.

No. Some are revisited, some are filled completely and broken, and many are never returned to. Any trader who assumes a fill is certain will eventually be caught by one that does not happen.

A bullish gap forms in an up-move, between the first candle's high and the third candle's low. A bearish gap forms in a down-move, between the first candle's low and the third candle's high.

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