In both stocks and forex trading, the concept of a Fair Value Gap (FVG) has gained considerable traction among price-action and institutional-style traders. At its core, an FVG reflects a zone of imbalance between buyers and sellers where price skipped over levels, leaving an “open” gap or void. Because price rarely moves linearly across all levels, these gaps can often act as magnets for future price action.

What is a Fair Value Gap (FVG)?

An FVG is a price region where the market’s “fair value” changed rapidly, leaving less traded volume and hence an imbalance. Think of it as a terrain where the market didn’t fill all the orders, creating a vacuum. When price returns to this zone, it often reacts either reversing or exhibiting friction. In essence, it’s akin to support/resistance or supply/demand zones, but formed via a sharper, more abrupt move thus potentially offering faster setups.

How to Identify an FVG

FVGs typically form via a three candlestick pattern. The workflow:

Bullish FVG

• Spot a large green (bullish) candle that is significantly larger than the candles immediately to its left and right.

• The candle immediately left should not overlap (high of left) with the low of the candle immediately right if it does, the gap is invalid.

• Draw a zone: bottom of zone = high of left candle, top of zone = low of right candle.

• Extend the box into future bars. If price returns into this zone, the expectation is a potential reversal upward.

• If price falls through the bottom of this zone, the bullish FVG is invalid and one should stop using it.

Bearish FVG

• Spot a large red (bearish) candle that dominates its neighbours.

• The candle to the left: its low must not overlap with the high of the candle to the right.

• Construct the zone: top = low of left candle, bottom = high of right candle.

• Extend this box forward. If price revisits this zone, expect possible bearish reaction (i.e., price may drop).

• If price rises above the top of the zone, the bearish FVG becomes invalid.

The Theory Behind FVGs

When price spikes, it often means large orders were executed, and market participants positioned themselves accordingly. Suppose an asset fluctuated in a range (e.g. $9-$10). A sudden move pushes price to $11. The participants who bought earlier may hold, believing new levels are safe; thus the market’s fair value shifts from $9-$10 to $10-$11. The zone between $10-$11 is now “less traded” — it’s an FVG. If price comes back to that range, participants may act (buy or sell) to rebalance, causing a reaction.

In short: a rapid directional move → an imbalance (gap) → a potential reactive zone when price returns.

Best Time-Frames & Instruments for FVGs

• Shorter time-frames (intraday charts like 3-min, 5-min, 15-min) tend to produce FVGs that form quickly.

• They are not limited to stocks — you can use them in cryptocurrencies, futures, FX pairs especially in instruments with high volume and liquidity.

• With higher volume, the imbalance is more meaningful and reactions tend to be clearer.

Accuracy & Limitations

• Because FVGs are based on a three-candle pattern, they form swiftly but are somewhat less reliable compared to larger structural zones.

• Not every FVG results in a reaction; some get filled without a meaningful price move.

• Proper risk management remains critical when trading off these zones.

Summary

• Locate a large candle relative to its neighbours.

• Draw your zone (bullish or bearish) based on non-overlap rules.

• Extend it. Monitor for price return and reaction.

• Validate or invalidate depending on price action.

• Use in conjunction with other confluences (structure, sentiment, volume, time-of-day) to improve odds.