Level 3 · Lesson 6
Fair Value Gaps
The imbalance magnet. When price moves too fast, it leaves a gap — and gaps ALWAYS get filled.
First — Why This Matters
🕳️ Price HATES imbalance. Every gap gets filled.
When an institution buys so aggressively that price jumps $5 in a single candle, it leaves behind unfilled orders in the zone it skipped. Think of it like a car driving so fast over a pothole that it doesn't feel the bump — but the pothole is still there. The market ALWAYS comes back to fill that pothole.
A Fair Value Gap is that pothole — a 3-candle pattern where the middle candle is so large that the wicks of Candle 1 and Candle 3 don't overlap. That non-overlapping zone IS the FVG. It represents price that was traded through too quickly, leaving pending orders behind.
FVGs are one of the most reliable entry zones in all of SMC because they combine institutional footprints with the market's natural tendency to seek balance. Every FVG is a magnet — and you can position yourself at the magnet before it pulls price back.
🔍 REAL SCENARIO
Bitcoin at $62,000. A massive green candle pushes price to $65,500 in 4 hours, leaving a clear FVG between $63,000 and $64,200. Over the next 2 days, Bitcoin pulls back to $63,800 — right into the FVG. A bullish engulfing forms inside the gap. Traders who spotted the FVG bought at $63,800 with a stop at $62,900. Bitcoin then rallied to $68,000. The pothole pulled price back. The bounce was the entry. The math worked perfectly.
01 — The 3-Candle Rule
How an FVG Forms
Watch this animation. Three candles — and the gap between Candle 1's wick and Candle 3's wick is the FVG.
Candle 1: The Setup
A normal candle. Nothing special about it. But its HIGH (top of the upper wick) becomes the BOTTOM boundary of the FVG.
💡 Think of this as the edge of the road before the pothole starts.
Candle 2: The Explosion
A HUGE impulsive candle — much bigger than normal. This is the institution entering with force. The candle is so big that it "jumps over" a price zone without properly trading through it.
💡 The car speeding so fast it flies over the pothole without touching the ground.
Candle 3: The Reveal
The next candle starts trading. Its LOW (bottom of the lower wick) becomes the TOP boundary of the FVG. The GAP between Candle 1's high and Candle 3's low is the Fair Value Gap.
💡 You look back and see the pothole. The road between the edge (C1 high) and where you landed (C3 low) was never properly driven over.
02 — Two Types
Bullish vs Bearish FVGs
Bullish FVG ↑
Gap BELOW current price. Created by an impulsive UP candle. Candle 2 was a big green candle.
💡 Acts as: Support zone. When price pulls back into a bullish FVG, expect a bounce UP. This is your BUY zone.
Like a pothole below you — if you fall into it, the road pushes you back up.
Bearish FVG ↓
Gap ABOVE current price. Created by an impulsive DOWN candle. Candle 2 was a big red candle.
💡 Acts as: Resistance zone. When price rallies into a bearish FVG, expect rejection DOWN. This is your SELL zone.
Like a ceiling with a hole in it — if you jump up into it, it pushes you back down.
03 — How Gaps Get Filled
Partial, Full, and Inverted Fills
Not every fill is the same. Understanding the type of fill changes how you trade it. Tap each type.
04 — Trading Fair Value Gaps
The Complete FVG Trade
Spot the FVG on the HTF
Find the 3-candle pattern with the gap. Mark the zone between Candle 1's wick and Candle 3's wick. This is your target zone.
Wait for the pullback
Don't trade when the FVG forms — the move has already happened. Wait for price to RETURN to the gap. Patience is the edge.
Set a limit order inside the FVG
Place a limit buy order inside the bullish FVG (or limit sell for bearish). Many pro traders set the order at the 50% mark of the gap — the "equilibrium" of the imbalance.
Confirm on LTF (optional but recommended)
For higher probability: wait until price enters the FVG AND shows a bullish/bearish reaction on the lower timeframe. A CHoCH or engulfing candle inside the FVG = confirmation.
Stop below/above the FVG
If bullish: stop goes below the FVG's bottom. If bearish: stop goes above the FVG's top. If the entire gap gets broken, your thesis was wrong.
Target: next liquidity or opposing FVG
Your take-profit sits at the next liquidity level (previous high/low) or at an opposing FVG on the other side. FVG → opposing FVG often gives excellent R:R.
05 — Read the Gap
What Happened at This FVG?
5 charts with FVG zones marked. Identify the scenario.
06 — Knowledge Check
Fair Value Gap Quiz
1. A Fair Value Gap (FVG) is:
2. In layman's terms, an FVG is like:
3. Why do FVGs tend to get filled?
4. A BULLISH FVG has its gap between:
5. What does it mean when an FVG gets "inverted"?
6. When trading a bullish FVG, you should:
7. An FVG combined with an Order Block at the same price level is:
8. A "partial fill" of an FVG means:
🔒
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