Smart Money Concepts

Fair Value Gap (FVG): a three-candle imbalance

A Fair Value Gap, or FVG, is a price range left behind when a strong move happens so quickly that the first and third candles of a three-candle sequence do not overlap. SMC traders call it an imbalance and watch whether price later returns to it.

What it is

In a bullish FVG the high of candle 1 is below the low of candle 3. The gap between them is the zone. A bearish FVG is the reverse: the low of candle 1 is above the high of candle 3.

It is called a gap because that range saw little two-way trading. Some traders expect price to revisit it; there is no rule that it must.

How to spot it

1. Find a strong, large-bodied candle (candle 2) moving fast in one direction.
2. Look at the candle before it (1) and the candle after it (3).
3. If candle 1's high is below candle 3's low (bullish), or candle 1's low is above candle 3's high (bearish), the space between is the FVG.
4. Draw a box from candle 1's wick to candle 3's wick and extend it to the right. Note whether price later trades into the box.

Worked example (illustrative)

Illustrative example: candle 1 has a high of 102.5. A large candle follows, and candle 3 has a low of 106. The range from 102.5 to 106 was never traded between candles 1 and 3, so it is a bullish FVG. Later, price falls back into 104 to 105 and then closes higher; the zone was 'tested'.

Common mistakes

• Marking every small gap. Tiny FVGs on a noisy chart are common and many are meaningless.
• Assuming every FVG gets filled, or that it holds when tested. Both fail regularly.
• Ignoring context. An FVG with the trend and near a key level is read very differently from an isolated one.

Educational content only, using made-up prices. It is not investment advice and not a recommendation to buy, sell or hold anything. Trading carries risk of loss.

Frequently asked questions

Related concepts

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