Fair Value Gaps (FVGs)

Understanding Fair Value Gaps (FVGs) in Smart Money Trading

Fair Value Gaps represent a key technical analysis concept within the Smart Money Concepts (SMC) framework, designed to help retail traders identify and follow institutional trading patterns.

Definition and Core Concept

A Fair Value Gap identifies a price inefficiency created when the market moves rapidly, leaving insufficient time for balanced order execution between buyers and sellers. These gaps typically appear across three consecutive candlesticks and represent areas where the market may eventually return to restore equilibrium.

FVGs are typically detected by examining three consecutive candles:

Bullish FVG:
If the low of candle 2 is higher than the high of candle 1, there is a gap between those candles.
That range (high of candle 1 to low of candle 2) = FVG zone.

Bearish FVG:
If the high of candle 2 is lower than the low of candle 1, the gap is between the low of candle 1 and high of candle 2.

Formation Pattern:

First candle: Establishes initial direction (bullish)
Second candle: Creates strong momentum with significant price movement
Third candle: Continues or consolidates the move

The inefficiency zone exists between the first candle’s high and the second candle’s low, creating the Fair Value Gap.

Trading Applications

Traders utilize FVGs as strategic zones for several purposes:

Market Expectations:

Price reversion to fill the identified gap
Directional continuation after gap completion

Strategic Implementation:

Entry positioning: Placing orders within FVG zones for potential reversals or continuations
Profit targeting: Using gaps as potential exit points
Risk management: Leveraging gap levels for stop-loss placement based on liquidity expectations

Historical Development:

The foundation of price imbalance analysis stems from established trading theories including auction market theory, market profile methodology, and volume spread analysis. The specific terminology Fair Value Gap gained widespread recognition through:

ICT (Inner Circle Trader, also known as Michael J. Huddleston) — A trading instructor who popularized current Smart Money Concepts framework, encompassing FVGs, Order Blocks, and Liquidity Sweeps.
ICT’s methodology has gained significant traction across social media platforms including YouTube, Telegram, and various trading communities, particularly within forex and cryptocurrency trading circles.

Conceptual Background:

The underlying principle of price imbalance dynamics has its roots in established trading methodologies such as auction market theory, market profile analysis, and volume spread analysis. The distinctive terminology Fair Value Gap gained prominence through:

ICT (Inner Circle Trader, known as Michael J. Huddleston) — A trading instructor who developed the contemporary Smart Money Concepts framework, which includes FVGs, Order Blocks, and Liquidity Sweeps.
ICT’s methodologies have experienced substantial growth across digital platforms such as YouTube, Telegram, and specialized trading communities, with particular adoption among forex and cryptocurrency market participants.

Advantages of FVG Analysis:

Statistical reliability: Historical tendency for price to revisit gap areas
Institutional alignment: Reflects how large market participants create and resolve imbalances
Clear identification: Objectively defined levels suitable for systematic trading approaches
Multi-timeframe application: Effective across various trading horizons from intraday to long-term

This approach provides traders with a structured method for identifying potential market inefficiencies and positioning themselves accordingly.

Limitations and Potential Drawbacks:

Incomplete fills: Many gaps persist for extended periods or may never be filled at all.
Delayed confirmation: FVGs provide hindsight analysis, meaning price action may have already progressed beyond the identified level.
Interpretation variance: Traders often identify and mark FVGs differently, creating inconsistent application across market participants.
Absence of fundamental support: Skeptics contend that FVGs lack backing from underlying economic fundamentals or market data.

Distinguishing FVGs from Conventional Market Gaps:

Conventional price gaps (commonly observed in daily stock charts) typically result from after-hours developments such as news releases or earnings announcements, creating actual price voids where no transactions occurred.

Fair Value Gaps occur during active trading periods and represent momentary supply-demand imbalances rather than information-driven discontinuities in price action

The best timeframes for Fair Value Gap (FVG) analysis depend on your trading style, but here’s a breakdown based on common usage:

Higher Timeframes (Daily, 4H, Weekly)

Best for: Swing trading, positional trades, long-term setups

Why?

Gaps are more meaningful — institutions operate on these timeframes.
Stronger, more reliable FVG zones.
Reduces noise and false signals.

Typical Use: Wait for price to return to a daily FVG zone, then drill down to 1H or 15M for precise entries.

Example Strategy:

Identify FVG on the Daily chart
Refine entry with confirmation on the 1H or 15M

Intraday Timeframes (15M, 5M, 1M)

Best for: Day trading, scalping

Why?

Allows for precise entries and quick trades within the day.
More frequent FVGs = more opportunities, but also more noise.Watch Out
Lower timeframes create many small FVGs, but not all are meaningful.
Must be paired with structure or higher-timeframe context.Example Strategy:
- Use 1H for trend bias, and 5M for entries when price enters a lower-timeframe FVG aligned with the bigger trend.

Smart Money Tip:

FVGs are most effective when combined with:
- Liquidity zones
- Market structure
- Order blocks
- Breakers or mitigation blocks

Timeframe	Style	Reliability	Frequency	Notes
1W / 1D	Swing trading	⭐⭐⭐⭐	Low	Best for major zones
4H / 1H	Position/Day	⭐⭐⭐⭐	Medium	Good for trend confirmation
15M / 5M	Day trading	⭐⭐⭐	High	Good entries, but more false signals
1M	Scalping	⭐⭐	Very High	Very noisy, needs fast execution

The Bottom Line

Fair Value Gaps (FVGs) represent critical price inefficiencies within Smart Money trading methodologies, identifying zones where rapid price movement creates temporary imbalances between supply and demand. These areas frequently attract price revisitation, providing traders with high-probability entry opportunities and strategic positioning for exits or liquidity operations.

Applicable across multiple timeframes and asset classes, FVGs reveal institutional trading patterns and underlying market dynamics. While requiring confirmation from complementary analysis—including market structure assessment, liquidity mapping, and volume profiling—they substantially enhance trade timing and execution precision.

Fair Value Gaps deliver a systematic, reproducible framework for anticipating market retracements and directional shifts, establishing them as an essential component within comprehensive technical trading strategies.