Want to trade like the pros? Learn the FVG Trading Strategy. This guide covers how banks and institutions create Fair Value Gaps and how you can use them to your advantage.
What is a Fair Value Gap (FVG)? The Core Concept
A Fair Value Gap (FVG) is a three-candlestick pattern that forms a specific imbalance in price action. It occurs when market forces create a strong, impulsive move, leaving behind a gap or an overlap in the market’s transactional flow. In essence, it’s a price zone where one side of the market (either buyers or sellers) was overwhelmingly dominant, leading to very few transactions occurring at those specific price levels.
Think of it like a auction where a rare item is for sale. If the opening bid is $100 and someone suddenly shouts “$500!”, the auctioneer quickly accepts, skipping all the prices in between. The zone between $100 and $500 saw no transactions; it’s an inefficient price area. The FVG is that skipped zone on your trading chart, and the market often feels compelled to return to it to “test” it and allow for transactions to finally occur there—hence the term “Fair Value.”
The Psychology Behind the Fair Value Gap
The psychology is driven by the overwhelming aggression of smart money—the large players like banks and hedge funds.
- Impulse Move: A large influx of orders (e.g., a massive buy order) hits the market.
- Sweeping Liquidity: This order aggressively consumes all available sell-side liquidity (stop losses, resting orders) at multiple price levels in a very short time.
- Inefficiency: The move is so fast and powerful that the price “jumps” from point A to point C without transacting at point B. This creates the FVG.
- The Return: Once the momentum slows, price often retraces to this untraded zone (point B) to “mitigate” the imbalance, allowing other market participants to enter at these prices and establishing fair value.
Fair Value Gap vs. Regular Market Gap: What’s the Difference?
This is a crucial distinction. A regular market gap (like a news gap) occurs when the market opens at a significantly different price than the previous close, leaving a literal empty space on the chart. These are common in stocks and forex over weekends.
An FVG, however, can occur at any time during a trading session and does not necessarily have to be a literal visible gap. It is identified by the relationship between the wicks and bodies of three consecutive candles.
| Feature | Fair Value Gap (FVG) | Regular Market Gap |
|---|---|---|
| Formation | Can form anytime, intra-session. | Typically forms at the open vs. the previous close. |
| Appearance | Defined by candle wicks; may not be a visible blank space. | A clear, visible blank space between two candles. |
| Cause | Extreme order imbalance and liquidity sweep. | Reaction to news/events outside of trading hours. |
| Trading Approach | Used as a potential support/resistance for entries on a retest. | Often traded as a “gap and go” or “gap fill” strategy. |
How to Identify a Fair Value Gap on a Chart
Identifying an FVG is a mechanical process. Here’s the step-by-step rule:
A Bullish FVG forms when the wick of the third candle does not overlap with the wick of the first candle. The space between the top of the first candle’s wick and the bottom of the third candle’s wick is the FVG zone.
- Look for: A strong down candle, then an even stronger UP candle.
- The Gap: The low of the up candle’s wick is above the high of the down candle’s wick.
A Bearish FVG forms when the wick of the third candle does not overlap with the wick of the first candle. The space between the bottom of the first candle’s wick and the top of the third candle’s wick is the FVG zone.
- Look for: A strong up candle, then an even stronger DOWN candle.
- The Gap: The high of the down candle’s wick is below the low of the up candle’s wick.
Best Indicators and Tools for FVG Trading
While you can identify FVGs manually, tools make it easier:
- TradingView: This is the best platform for FVG trading. Use the “Smart Money Concepts (SMC)” indicator by LonesomeTheBlue or similar scripts. They automatically highlight FVG zones on your chart.
- MT4/MT5: Custom indicators are available in the marketplace that can plot these zones for you.
- Price Action: With practice, your eye will become trained to spot these imbalances naturally.
The Different Types of Fair Value Gaps
Bullish FVG (Buy-Side Liquidity Gap)
This forms in an uptrend or at a potential market bottom. It signifies that buying pressure was so intense that it created an inefficiency to the upside. This zone will now act as a potential support area. When price returns to this zone, we look for buying opportunities.
Bearish FVG (Sell-Side Liquidity Gap)
This forms in a downtrend or at a market top. It signifies that selling pressure was so intense that it created an inefficiency to the downside. This zone will now act as a potential resistance area. When price returns to this zone, we look for selling opportunities.
How to Trade the FVG Strategy: Entries, Exits, and Rules
Trading FVGs isn’t just about entering as soon as price touches the zone. Discipline is key.
The FVG Retest: The Prime Entry Trigger
The most reliable entry is on the first retest of the FVG zone. You wait for price to return to the zone and then look for a price action confirmation signal to enter in the direction of the original impulse move that created the FVG.
- For a Bullish FVG: Wait for price to fall back into the FVG zone. Look for a bullish reversal candlestick pattern (like a hammer, bullish engulfing, or pin bar) forming within the zone. Then, enter LONG.
- For a Bearish FVG: Wait for price to rally back into the FVG zone. Look for a bearish reversal candlestick pattern (like a shooting star, bearish engulfing, or pin bar) forming within the zone. Then, enter SHORT.
Setting Your Stop-Loss (SL) and Take-Profit (TP)
- Stop-Loss (SL): Your stop loss should be placed on the other side of the FVG zone. For a long trade from a Bullish FVG, place your SL just below the bottom of the FVG zone. This invalidates the trade if the price completely fills (“mitigates”) the gap.
- Take-Profit (TP): There are several methods:
- Previous Structure: Take profits at the next significant swing high (for longs) or swing low (for shorts).
- Risk-Reward Ratio: Aim for a minimum 1:1.5 or 1:2 risk-to-reward ratio.
- Liquidity Pools: Target obvious liquidity pools above/below the market.
FVG Trading Strategy Example on a Real Chart
*Imagine a strong bearish move on the EUR/USD. A large red candle forms, followed by an even larger green candle that rockets upward. The low of this green candle’s wick is above the high of the red candle’s wick. A Bullish FVG is created. The price then continues up before eventually pulling back a few hours later. It approaches the FVG zone. As it enters the zone, a clear hammer candlestick forms on the 15-minute or 1-hour chart. This is your entry signal for a long trade. You place your stop loss just below the bottom of the FVG zone and your take profit at the recent swing high. The trade is now active with a clear risk management plan.*
Advanced FVG Concepts for Seasoned Traders
Using FVGs as Support and Resistance (Breaker Blocks)
Often, an FVG that has already been tested and held will act as a powerful support or resistance zone—sometimes called a “Breaker Block.” If price rejects strongly from an FVG, it can be a great entry for a continuation trade in the original trend direction.
Mitigation vs. Utilization: Will the Price Fill the Gap?
- Mitigation: This is when price returns and fully fills the FVG zone. Your trade would be stopped out if this happens.
- Utilization: This is when price only partially enters the FVG zone and then reverses strongly in the intended direction. This is what you want to see for a successful trade. The key is the strength of the price action confirmation at the retest.
Combining FVGs with Other SMC Concepts
FVGs are powerful, but they are even more powerful when they align with other concepts:
- Order Blocks: An FVG often originates from a prior Order Block. Trading an FVG retest that coincides with an OB is a high-probability setup.
- Liquidity: FVGs are created by sweeping liquidity. Look for them above swing highs (liquidity grabs) for shorts and below swing lows for longs.
- Market Structure: Only trade FVGs in the direction of the overall trend or market structure shift. A Bullish FVG in a overall downtrend is far less reliable.
The Limitations and Risks of the FVG Strategy
No strategy is holy grail. FVGs can fail.
- Not Every FVG Gets Filled: Price may never return to the zone, causing a missed opportunity.
- False Signals: Sometimes price will mitigate the entire FVG, hitting your stop loss before reversing. This is why a stop loss is non-negotiable.
- Market Context is King: Trading an FVG against the overarching trend or during low liquidity times (like lunch hour) is a low-probability game.
- Overplotting: On lower timeframes, indicators can plot dozens of FVGs, creating confusion. Always focus on the most significant ones (largest gaps) that align with higher-timeframe structure.
Featured Snippet Answer
A Fair Value Gap (FVG) is a three-candle price pattern showing a market inefficiency caused by a strong, impulsive move. It creates an untraded zone that price often returns to, offering high-probability trading opportunities based on the principles of Smart Money Concepts (SMC).
FAQs
1. What timeframe is best for trading FVGs?
FVGs can be found on any timeframe, but they are most reliable on the 1-hour, 4-hour, and daily charts. Lower timeframes (like 1-min or 5-min) generate many FVGs, most of which are insignificant noise.
2. How long does it take for an FVG to be filled?
There’s no set time. It could be retested and filled within the next few candles, or it could take days or even weeks on higher timeframes. The key is to be patient and wait for the price to come to your zone.
3. Can I trade FVGs in isolation?
While possible, it’s not recommended. FVGs work best when combined with other forms of analysis, such as overall market structure, trend direction, and key support and resistance levels. Confluence is the key to high-probability trading.
4. What is the win rate of the FVG strategy?
There is no universal win rate. Its effectiveness depends entirely on your ability to filter for high-quality setups (e.g., FVGs in line with the trend and at key levels) and your risk management. A well-executed strategy can have a high win rate, but it requires discipline.
5. Is the FVG strategy only for forex?
No, the FVG strategy is based on pure price action and liquidity, so it can be applied to any liquid market, including stocks, indices, commodities, and cryptocurrencies.
6. What’s the difference between an FVG and an Order Block?
An Order Block is the initiating candle(s) that causes the impulsive move. The Fair Value Gap is the actual inefficiency or gap that is left behind as a result of that move. They are closely related but identify different parts of the same market phenomenon.