What is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) occurs when there is a rapid price move in a single direction, leaving a gap in the price action where no trading occurred at certain levels. It is typically identified as the space between the high of the first candle and the low of the third candle in a three-candle sequence.

How do you trade an FVG?

Traders often look for price to return to the FVG area (the 'retest') to fill the imbalance before continuing in the original direction. This is known as a 'displacement' trade.

The Ultimate Fair Value Gap (FVG) Trading Guide

Introduction to Market Imbalance

To understand a Fair Value Gap (FVG), you must first understand how institutional orders move the market. Unlike retail traders who buy in small lots, institutions move millions of dollars at once. When a massive buy or sell order hits the market, it often creates a "displacement"—a rapid move that leaves other market participants behind.

This displacement creates an Imbalance. The market seeks efficiency, and when an imbalance is created, price has a "magnetic" tendency to return to that level to fill the orders that were missed during the initial surge. This is the core of the FVG trading strategy.

Defining the FVG

A Fair Value Gap is a 3-candle pattern. In a bullish FVG, it is the gap between the Highof Candle 1 and the Low of Candle 3. This space represents price levels where only buying occurred, leaving a "vacuum" of sell liquidity.

How to Identify a Fair Value Gap

Identification is the first step toward mastery. While many indicators claim to find FVGs, understanding the manual process is vital for discretion.

Bullish FVG (BISI - Buyside Imbalance Sellside Inefficiency)

Look for a large green candle. If the high of the candle before it and the low of the candle after it do not touch or overlap, the space between them is your Bullish FVG.

Bearish FVG (SIBI - Sellside Imbalance Buyside Inefficiency)

Conversely, look for a large red candle. If the low of the candle before it and the high of the candle after it do not overlap, that empty space is a Bearish FVG.

The "AlgoAlpha" Edge: Institutional Liquidity

At AlgoAlpha, we don't just look for any FVG. We look for **High-Probability FVGs**. An FVG is most powerful when it occurs after a Liquidity Sweep or aMarket Structure Break (BOS).

Using our ILPAC™ (Institutional Liquidity & Price Action Concepts) indicator, you can automatically see these zones plotted on your chart. ILPAC filters out the "noise" and highlights only the imbalances that institutional algorithms are likely to protect.

Explore ILPAC™ View Library

Advanced FVG Trading Strategies

1. The Mitigation Entry

Wait for price to trade back into the FVG. Often, price will tap the 50% level (the Mean Threshold) of the FVG before reversing. This provides an excellent risk-to-reward ratio.

2. The SMT Divergence Combo

If Bitcoin creates an FVG and retests it, while Ethereum fails to reach its corresponding FVG, this is a powerful Smart Money Technique (SMT) divergence, signaling a massive move is incoming.

Common Mistakes to Avoid

Trading every FVG: Not all gaps are filled immediately. Context is king.
Ignoring Higher Timeframe (HTF) Context: A 1-minute FVG means nothing if it's trading against a 4-hour trend.
Placing Stops inside the FVG: Always place your stop loss behind the candle that created the imbalance.

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