What is the Fair Value Gap and How to Use It

A Fair Value Gap (FVG) is a price imbalance on a chart that occurs when the market moves too quickly in one direction, leaving unfilled space between consecutive candles. These gaps represent areas where the price moved without enough opposing orders to fill both sides of the market. Smart money traders often interpret these zones as areas where institutional activity has disrupted the normal auction process.

Understanding how to identify and use Fair Value Gaps can help traders anticipate potential retracement points, uncover hidden liquidity zones and align entries with institutional flow. In this article, we’ll break down what Fair Value Gaps are, why they matter and how to apply them effectively in real trading environments.

How Fair Value Gaps Form

A Fair Value Gap forms when the market experiences a sharp move, often driven by aggressive institutional buying or selling. During this move, price skips over levels where normal trading would typically occur, creating an imbalance between buyers and sellers. On a candlestick chart, this appears as a gap between the low of one candle and the high of the next two candles or vice versa.

For example, in a bullish move

• Candle 1 closes with a high
• Candle 2 surges upward
• Candle 3 opens higher, leaving a gap between the high of Candle 1 and the low of Candle 3

This “gap” represents a price level where there was little or no trading activity, an imbalance. Institutional traders often revisit these areas to fill orders that were left behind, which makes them potential points for price reaction, consolidation or reversal. Fair Value Gaps are different from common gaps seen in equities. They are not caused by market closures or news events but occur within active trading sessions.

How to Identify Fair Value Gaps on Charts

Identifying a Fair Value Gap requires observing three consecutive candles on a price chart. The key is to find price imbalances that reflect inefficient trading, where the market skipped levels during a strong move.

In a bullish scenario

• Look for three consecutive bullish candles.
• The first candle sets a high.
• The second candle closes higher with strong momentum.
• The third candle opens higher, leaving a visible gap between the high of the first candle and the low of the third candle.

In a bearish move

• Look for three consecutive bearish candles.
• The first candle sets a low.
• The second candle drops further.
• The third candle opens lower, creating a gap between the low of the first candle and the high of the third candle.

These gaps are easiest to spot on the 5-minute, 15-minute and 1-hour charts, though they appear across all timeframes. Traders mark the gap range as a zone of interest, anticipating a possible price revisit.

Charts should always be reviewed in context. Not every gap indicates a strong opportunity, but many serve as magnets for price, especially when aligned with liquidity pools or key market levels.

How to Trade Using Fair Value Gaps

Once a Fair Value Gap is identified, traders look for price to return to that imbalance. This retracement is often seen as an opportunity to enter in the direction of the original move, aligning with institutional flow.

There are two common approaches:

Rejection Entry

Traders wait for price to retrace into the Fair Value Gap zone and show signs of rejection. This might include a strong wick, a shift in structure or confirmation from volume or a lower timeframe signal. Once the reaction confirms, they enter in the direction of the initial impulse.

Full Gap Fill

Some traders prefer waiting for price to fully fill the entire gap zone before entering. This approach is more conservative and reduces the chance of entering prematurely. Once the gap is filled and price respects the zone, an entry can be placed with a stop just beyond the gap boundary.

Stop-loss placement

It’s common to place stops just beyond the Fair Value Gap range, depending on the risk profile and market context. Traders often use the high or low of the gap candles as invalidation.

Targets

Targets are typically placed at recent swing highs or lows or near opposing liquidity zones. Fibonacci extensions and volume imbalance levels can also guide exits.

Trading Fair Value Gaps works best when paired with overall market structure, liquidity zones and a clear bias. They are most effective in trending environments or after a market shift.

Real Examples of Fair Value Gaps in Action

To better understand how Fair Value Gaps work in real trading, let’s walk through a few chart-based examples from common markets. These setups highlight how price reacts when returning to imbalance zones.

Example 1: EUR/USD on 15-Minute Chart

The pair rallies sharply during a European session, creating a bullish Fair Value Gap between 1.0735 and 1.0740. After reaching 1.0770, price retraces and taps the FVG zone before continuing higher. Entry confirmation appears as a bullish engulfing candle right inside the gap, offering a clean long setup.

Example 2: NASDAQ 100 on 1-Hour Chart

During a news-driven move, NASDAQ gaps down rapidly. A bearish Fair Value Gap forms between 15240 and 15210. Later, price returns to fill the gap, stalls for two candles, then resumes its downward momentum. Traders use the fill point to enter short, targeting the prior swing low.

Example 3: BTC/USD on 5-Minute Chart

In high-volatility conditions, BTC breaks upward from consolidation. A gap is left behind between 26,380 and 26,440. On a minor pullback, price fills the zone, bounces with high volume and resumes the trend. A short-term scalp using the gap fill as support delivers a low-risk opportunity.

Tools and Platforms for Spotting Fair Value Gaps

Manually identifying Fair Value Gaps takes time and can be inconsistent, especially for traders monitoring multiple instruments. Modern trading platforms and charting tools offer efficient ways to detect these gaps with accuracy.

Quadcode Trading Platform

The Quadcode platform includes advanced charting and indicator integration. Brokers building on Quadcode can offer traders enhanced visualization tools, custom FVG indicators and built-in drawing features. This enables users to spot price inefficiencies in real time and react with speed. 

TradingView

TradingView allows traders to create custom scripts using Pine Script. There are free and paid indicators that automatically highlight Fair Value Gaps. Look for scripts like “FVG Finder” or “Imbalance Detector” in the public library to mark gap zones directly on your chart.

MetaTrader 5 (MT5)

Some MT5 indicators scan candles for missing price zones between highs and lows of sequences and visually draw boxes where FVGs occur. This is useful for traders who use MT5 for Forex or CFD trading.

When Fair Value Gaps Are Most Reliable

Not every Fair Value Gap leads to a trade-worthy opportunity. Their reliability increases under specific conditions. Traders improve accuracy by focusing on setups that meet the following criteria:

• Occurs After a Strong Breakout – Gaps that follow a clear breakout from consolidation or a range tend to act as true imbalances. These often mark institutional entry zones that the price may revisit.
• Aligned With Market Structure – FVGs that form within a well-defined trend (higher highs and higher lows in a bullish trend or lower highs and lower lows in a bearish one) are more dependable.
• Supported by Volume or Order Flow – An FVG confirmed by a volume spike or order book imbalance has a higher chance of reacting. These indicate real buying or selling interest behind the move.
• Appears Near Key Liquidity Zones – FVGs located near recent swing highs, lows or known stop-hunt areas tend to attract smart money attention.

Fair Value Gaps in Algorithmic and Smart Money Trading

Fair Value Gaps have gained popularity due to their connection with smart money concepts and algorithmic trading behavior. These gaps often represent footprints left by institutions using high-frequency execution algorithms that enter or exit large positions across multiple price levels.

Institutional algorithms rarely fill orders at a single price. Instead, they execute in bursts, which sometimes causes price to surge or drop rapidly, leaving behind unfilled areas, Fair Value Gaps. These imbalances are then used as reference zones by the same or other participants looking to fill remaining orders.

Smart money traders interpret these zones as high-interest areas. When price returns to a Fair Value Gap, it’s often met with a reaction, either as absorption (re-entry by large players) or rejection (defensive exit of remaining positions). This behavior is what makes FVGs a central part of many smart money-based trading strategies, especially those built around liquidity manipulation, market structure shifts and order block theory.

Combining Fair Value Gaps With Other Concepts

FVGs are most powerful when used with complementary tools. They aren’t meant to be used in isolation and combining them with the following concepts adds precision:

• Liquidity Pools – Identify where traders’ stop-loss orders are likely clustered. FVGs near these levels act as magnets for price, as institutional players hunt stops before moving price in the intended direction.
• Breaker Blocks and Order Blocks – These supply or demand zones mark institutional order flow areas. FVGs within these zones are often highly reactive.
• Market Sessions and Timing – Gaps that form during the London or New York sessions, when volume is highest, tend to produce more reliable setups than those formed during low liquidity periods.
• Internal vs. External Range Analysis – Traders analyzing FVGs in relation to the internal (midrange) or external (range highs/lows) of a price leg often find better precision in targeting and entries.

Conclusion

Fair Value Gaps offer traders a powerful lens into institutional activity and market inefficiency. By learning to identify these imbalances and understanding how price behaves around them, traders gain access to trade setups that are often hidden to retail eyes. When used with structure, liquidity and confirmation tools, FVGs can add precision and confidence to both intraday and swing trading strategies.

Whether you’re trading forex, indices or crypto, recognizing these zones improves entry timing, risk management and market interpretation. Tools like the Quadcode platform make spotting and reacting to Fair Value Gaps easier, allowing traders to align with institutional order flow and build more effective setups.