What Are Fair Value Gaps (FVG)?
Fair Value Gaps are one of the most powerful concepts in Smart Money trading. An FVG occurs when price creates an unfilled gap between two candles, leaving behind an area of inefficiency that smart money capitalizes on. These gaps represent zones where traders (usually retail) were willing to trade, but institutional money skipped over to find better execution.
Why Smart Money Creates Fair Value Gaps
Institutional traders deliberately create FVGs because:
- They need to execute large positions without moving price significantly
- FVGs help them identify where retail traders are positioned
- These gaps are used as landmarks for future price action
- Smart money knows retail traders will try to "fill" these gaps, providing liquidity
How to Identify Fair Value Gaps
FVGs typically form during strong impulsive moves with large candles. Look for:
- Three consecutive candles where the third candle skips over the first candle's body
- No overlap between candle 1's body and candle 3's body
- Usually occurs after breakouts or strong momentum moves
- The gap represents "unfilled" price levels
Trading Fair Value Gaps Effectively
The FVG Trading Strategy involves waiting for price to return to fill these gaps. When price approaches an FVG:
- Price will often test the gap to fill the inefficiency
- Smart money knows retail will enter shorts/longs expecting a bounce/continuation
- This creates manipulation and often leads to liquidity grabs
- The savvy trader trades with smart money through the FVG, not against it
FVG Trading Entry Rules
Trade FVGs when combined with these additional factors:
- FVG is located at a previous order block (confluence is key)
- Price approaches the FVG from the correct direction
- The timeframe shows a break of structure or confirmation candle
- Risk/reward ratio is at least 1:2 or better
Real-World FVG Trading Example
EUR/USD 4-hour chart: Price breaks upward with a strong impulsive candle, creating an FVG above the breakout candle. Over the next 3-4 candles, price rallies 150 pips. Smart money then takes profit (creating a reversal), and price comes back down to "fill" the FVG that was created during the breakout. This is where we can enter a SHORT position with smart money, expecting price to continue lower after filling the gap.
Common FVG Mistakes
- Trading FVGs without order block confirmation
- Assuming ALL FVGs will be filled (some never are)
- Trading FVGs on lower timeframes where noise is high
- Ignoring the higher timeframe trend when trading FVGs
FAQ
A: No. Some FVGs remain unfilled for weeks or months. Focus on FVGs with order block confluence for better probability.
A: Daily and 4-hour charts produce the clearest FVGs with less noise than lower timeframes.