A fair value gap (FVG), also called an imbalance, appears when price moves so fast that one candle's range does not overlap with the candles on either side of it. On a bullish move, the gap is the space between the high of the first candle and the low of the third.
Why price often returns
Fast moves leave areas where little trading took place. Price frequently comes back to 'rebalance' part of that area before continuing. It does not always do so, and it does not always respect it when it does.
Using FVGs for entries
- Identify the trend on a higher timeframe.
- After a strong move in the trend direction, mark the FVG it left.
- Place a limit entry in the gap (often at its midpoint), with the stop beyond the gap or the swing.
- Target the recent high (for longs) or the next liquidity area.
Quality filters
- Gaps created by moves that broke structure are more meaningful.
- Gaps on higher timeframes (1-hour and above) carry more weight than 1-minute gaps.
- Gaps that have already been filled are spent.