What Is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) is a three-candle price pattern indicating an inefficiency in price delivery. It represents a zone where institutional orders were pushed through aggressively.

In essence, it's a gap or imbalance left behind when price moves with such velocity that one side of the market (buying or selling) is completely dominant, leaving parts of the price range untested. These gaps often act as magnets for future price action, as the market algorithmically seeks to rebalance and 'fill' the inefficiency.

Key Points

• Three-Candle Pattern: An FVG is defined by the space between the first candle's wick and the third candle's wick.
• Sign of Displacement: It signals aggressive, one-sided participation, often from institutional players. This is known as displacement.
• Price Magnet: FVGs act as a draw on liquidity. Price will often revisit these zones to mitigate orders and rebalance the price ladder.
• Context is Everything: Not all FVGs are created equal. Their significance increases dramatically when they appear in premium or discount zones or cause a break of structure (BOS).

How to Identify a Fair Value Gap

Identifying an FVG is a purely mechanical process once you understand the structure. There are two types: bullish and bearish.

A Bullish FVG (also called a BISI, or Buyside Imbalance Sellside Inefficiency) is formed by three consecutive candles during a strong upward move:

1. Candle 1: The high of this candle establishes the bottom of the gap.
2. Candle 2: A strong bullish candle that moves aggressively upward.
3. Candle 3: The low of this candle establishes the top of the gap.

The FVG is the space between the high of Candle 1 and the low of Candle 3. The wicks of these two candles do not overlap.

A Bearish FVG (also called a SIBI, or Sellside Imbalance Buyside Inefficiency) is the inverse, formed during a strong downward move:

1. Candle 1: The low of this candle establishes the top of the gap.
2. Candle 2: A strong bearish candle that moves aggressively downward.
3. Candle 3: The high of this candle establishes the bottom of the gap.

Here, the FVG is the space between the low of Candle 1 and the high of Candle 3. Again, there is no overlap between their wicks.

This concept of price inefficiency isn't exclusive to ICT. While traditional exchanges like the CME Group define gaps by session breaks, an FVG is a fractal, intraday representation of the same principle, often created by the high-speed algorithms that dominate modern markets.

When a Fair Value Gap Matters in Practice

An FVG in isolation is just a pattern. Its predictive power comes from its context within the broader market narrative.

The most potent FVGs are those created by a move that achieves something significant. For example, if a strong down-move creates a bearish FVG while also breaking a key structural low (a BOS), that FVG becomes a high-probability point of interest for a potential sell entry if price retraces into it.

Similarly, I've found that FVGs formed immediately after a liquidity sweep are particularly powerful. For instance, on GBP/USD during the London session, a sweep of Asian session highs followed by a sharp reversal that leaves a bearish FVG is a classic institutional setup. The gap represents the aggressive selling that followed the stop hunt.

The FVG also gains significance when it is part of the move that forms a valid order block. The FVG confirms the 'imbalance' that gives the order block its power. When price returns to mitigate the order block, it will often trade into the FVG first.

Manually tracking these confluences across dozens of pairs and timeframes is impractical. This is where automation becomes a necessity for a professional workflow. The LiquidityScan platform, for example, allows traders to build custom alerts that fire only when an FVG forms in conjunction with another key event, like our proprietary CISD (Change in State of Delivery) pattern, effectively filtering out noise and highlighting only the most significant institutional footprints.

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