Fair Value Gaps Explained
An intermediate-level guide to understanding imbalance, displacement and how institutions use inefficiencies in price.
An intermediate-level guide to understanding imbalance, displacement and how institutions use inefficiencies in price.
A Fair Value Gap (FVG) is an imbalance in price caused by aggressive institutional order flow. It appears when price moves so quickly that one side of the market is unable to provide liquidity, leaving a gap between candles. FVGs reveal inefficiencies that price often returns to in order to rebalance.
FVGs form during strong displacement — when institutions enter the market with large orders. This creates a three‑candle pattern where the middle candle does not overlap the wicks of the candles before and after it.
FVGs can appear in both bullish and bearish contexts, each providing different trading opportunities.
FVGs represent inefficiencies where the market did not trade fairly between buyers and sellers. Institutions often return to these areas to mitigate unfilled orders, rebalance price and continue the trend.
FVGs align closely with BOS (Break of Structure) and CHOCH (Change of Character). After displacement breaks structure, price often retraces into an FVG before continuing the trend. This creates high‑probability continuation setups.
Although similar, FVGs are not the same as liquidity gaps. Liquidity gaps occur when price jumps due to low liquidity, while FVGs are caused by aggressive institutional order flow. FVGs are more reliable for trading.
Traders use FVGs to identify high‑probability entry points, continuation setups and areas where price is likely to react. FVGs are especially powerful when combined with supply/demand zones or order blocks.
Fair Value Gaps reveal the hidden inefficiencies created by institutional order flow. By understanding how FVGs form and how price interacts with them, traders gain a deeper insight into market behaviour and can build more accurate trading models.
Explore more intermediate‑level lessons inside Quantisca Trading Academy.