What Is a Fair Value Gap?
A fair value gap (FVG) is a three-candle price pattern that represents an imbalance in the market — a zone where price moved so aggressively that it left behind an area with little to no trading activity. Specifically, an FVG forms when there is a gap between the wick of the first candle and the wick of the third candle, with the middle candle's body covering the displacement.
In a bullish FVG, the low of the third candle is above the high of the first candle. The space in between — the gap — is an area where buy orders overwhelmed the market so completely that sellers could not fill any orders. This creates an inefficiency that the market often returns to "fill" or "rebalance" before continuing.
Why Do Fair Value Gaps Form?
FVGs are the footprint of aggressive institutional order execution. When a large participant needs to fill a significant position quickly — often driven by news, data releases, or strategic repositioning — they consume all available liquidity at the current price and push through multiple levels without meaningful two-sided trading occurring.
Auction market theory, developed by J. Peter Steidlmayer through his Market Profile work, explains that markets seek to facilitate trade between buyers and sellers. When price moves through a zone without facilitating trade (creating an FVG), the market treats that zone as "unfair" — price has not been properly auctioned there. This creates a natural tendency for price to return and rebalance.
Identifying Fair Value Gaps on Charts
Bullish FVG
Look for a strong bullish candle (the displacement candle) where the low of the candle after it does not overlap with the high of the candle before it. The gap between these wicks is your bullish FVG. This zone acts as a potential support area where price may return for a retest.
Bearish FVG
The inverse pattern: a strong bearish displacement candle where the high of the following candle does not overlap with the low of the preceding candle. This gap serves as potential resistance.
Trading FVG Retests
- Identify the FVG: Mark the gap zone on your chart. The MoQ MS/OB indicator can help by highlighting imbalance zones alongside order blocks for a complete institutional picture.
- Wait for the retest: Do not enter immediately when the FVG forms. Wait for price to pull back into the gap zone.
- Look for confirmation: At the FVG, check for structural confirmation — a lower-timeframe CHoCH or a momentum shift on the MoQ Oscillator.
- Partial vs. full fill: Not every FVG gets fully filled. Some only see price enter the gap partially (a 50% fill is common) before reversing. Others get completely filled before the move continues. Higher-timeframe FVGs in trending markets are more likely to produce partial fills.
FVG Quality and Context
Not all fair value gaps are tradeable. The highest-probability FVGs share several characteristics: they formed during a strong impulsive move that caused a BOS, they are located in a discount zone (for bullish FVGs) or premium zone (for bearish FVGs), and they have not been previously tested. An untested FVG at a key structural level during a trending market is one of the cleanest setups available.
Combine FVG analysis with your higher-timeframe bias. A daily bullish FVG that aligns with a weekly uptrend and coincides with a bullish order block creates multi-layered confluence that significantly increases the probability of a successful retest trade.
Sources & Further Reading
- J. Peter Steidlmayer, Steidlmayer on Markets (2003) — the creator of Market Profile explains auction market theory and the concept of fair value.
- Michael J. Huddleston (ICT), ICT Mentorship: Fair Value Gaps (2018–2022) — comprehensive framework for identifying and trading FVGs in the context of smart money concepts.
- Investopedia, "Gap Definition" — foundational overview of price gaps and why they occur in financial markets.
- CME Group, "Understanding the Market Profile" — institutional explanation of Market Profile and auction market theory.
- TradingView, "Fair Value Gap" — practical charting guide for identifying FVGs on TradingView.