What Is a Fair Value Gap? FVG Explained With Rules

Take any three consecutive candles. For a bullish FVG, compare the high of the first candle with the low of the third. If the third candle's low is above the first candle's high, the space between those two prices is the gap.

For a bearish FVG, compare the low of the first candle with the high of the third. If the third candle's high is below the first candle's low, that space is the gap. The middle candle is almost always a large impulsive candle — it is the move that created the imbalance in the first place.

Two mechanical reasons. First, a fast move leaves unfilled orders behind — participants who wanted in at those prices never got a fill and their resting orders remain. Second, participants who entered late in the impulse are offside on any pullback and add supply or demand as price returns.

Note that gaps do not always fill, and there is no timeframe guarantee attached. In a strong trend, price can leave a series of gaps unfilled for a long period. Treating "gaps always fill" as a rule rather than a tendency is how traders end up fighting a trend.

The standard approach is to treat the gap as an entry zone rather than an entry price. Mark the range, wait for price to retrace into it, and look for a reaction — a rejection wick, a lower-timeframe shift in structure, a decline in momentum against your direction.

Risk is defined by the gap itself. If you enter long inside a bullish FVG, the premise is that buyers defend the imbalance; a close below the bottom of the gap says they did not. That gives a natural stop location that has nothing to do with how much you wish to risk.

Marking every gap on a one-minute chart produces dozens of zones per session, most of which are noise. Restrict yourself to gaps created by a genuinely impulsive move, ideally aligned with the higher-timeframe direction.

The second common error is entering the moment price touches the edge of the gap. Many gaps are filled completely, and some are filled and immediately reversed through. Waiting for the reaction inside the zone costs a little in entry price and saves a great deal in stopped-out trades.