A fair value gap (FVG) is a three-candle pattern where the first and third candles do not overlap. In a bullish FVG, the third candle’s low sits above the first candle’s high. In a bearish FVG, the third candle’s high sits below the first candle’s low. The space between them is the gap.
Traders mark that space and watch for a return. Spotting one is simple; what matters is precision. Has the third candle closed? Are you measuring wicks or bodies? What exactly counts as a fill, and what counts as failure? This guide sets clear rules, applies them to constructed examples and then to a real Ether chart from July 2026, where a perfect reaction still left no trade.
What does a fair value gap show?
An FVG marks a fast, one-sided move: the middle candle traveled far enough that candles 1 and 3 never overlapped. That is why the pattern often appears during displacement, the forceful moves SMC traders look for after a break of market structure.
The name is a little misleading. The middle candle did trade through the gap, so it is not a zone where no trading happened. It also has nothing to do with an asset’s fundamental “fair value”. It is simply a range price crossed quickly, which some traders expect to be revisited.
An FVG is also different from an ordinary price gap between one session’s close and the next session’s open. Those opening gaps are covered in our guide to why gaps occur. An FVG needs no session break; it shows up in 24/7 markets like crypto just as often.
How to identify a fair value gap
Number three consecutive candles 1, 2 and 3 on one timeframe, and use their full high-to-low ranges.
- Bullish FVG: candle 3 low > candle 1 high. The zone runs from candle 1’s high up to candle 3’s low.
- Bearish FVG: candle 3 high < candle 1 low. The zone runs from candle 3’s high up to candle 1’s low.
- No FVG: the wicks overlap or touch.
Wait for candle 3 to close. Until then, its low or high can still change and shrink or erase the gap. Some traders add filters such as a minimum gap size, a large middle-candle body or a preceding break of structure. Those are fine, as long as you write them down before testing.
Bullish fair value gap example
In this constructed example, candle 1’s high is 102.0. After a strong candle 2, candle 3 closes with its low at 104.0. The bullish FVG spans 102.0–104.0, a width of 2.0 points.
Its midpoint is 103.0. Traders often call this 50% level consequent encroachment (CE) and use it as a reference for how deep a return went.
Chart 01 · Hypothetical example
Bullish FVG: 102.0–104.0
- 1Lower boundaryCandle 1 high: 102.0. Use the wick, not the top of the body.
- 3Upper boundaryCandle 3 low: 104.0. Wait for this candle to close.
- RFirst later returnLow: 103.2; close: 104.5. A partial fill and recovery above the zone.
On the first return, R dips to 103.2 and closes at 104.5, back above the zone. Price entered the gap, did not reach the midpoint and did not fill it. Under the entry rule below, that closing recovery qualifies.
Bearish fair value gap example
Flip the picture. Candle 1’s low is 110.0, and candle 3’s high is 108.0 after a sharp drop. The bearish FVG spans 108.0–110.0, with a midpoint at 109.0.
Chart 02 · Hypothetical example
Bearish FVG: 108.0–110.0
- 1Upper boundaryCandle 1 low: 110.0. This supplies the top of the bearish zone.
- 3Lower boundaryCandle 3 high: 108.0. The completed gap is 2.0 points wide.
- RFirst later returnHigh: 108.8; close: 107.5. Price returns inside, then closes below.
The return R rallies to 108.8 and closes at 107.5, below the zone. Here the gap is being watched as resistance.
A look-alike that is not an FVG
Gaps between candle bodies are not enough. Say candle 1’s body ends at 101.5 but its upper wick reaches 104.2, while candle 3’s body starts at 104.7 with a low at 104.0. The bodies have clear space between them, but the wicks overlap from 104.0 to 104.2. Under the wick-based definition, there is no bullish FVG.
Chart 03 · Hypothetical example
Bodies separated; wicks overlap
- 1High: 104.2The wick extends well beyond the candle body’s 101.5 top.
- 3Low: 104.0The lower wick overlaps candle 1’s range by 0.2 points.
- ×No bullish FVG104.0 is not above 104.2. The body-to-body space does not qualify.
Touch, midpoint, full fill and invalidation
These four words describe different events, and mixing them up is the most common source of confusion with FVGs. For a bullish zone at 102.0–104.0, approached from above:
| Event | Price condition and meaning |
|---|---|
| Touch | Price reaches 104.0.The near edge has been reached. |
| Partial fill | Price enters below 104.0 but stays above 102.0.Some of the zone has been revisited; the midpoint may or may not be reached. |
| Midpoint reached | Price reaches 103.0.Halfway through the zone; not a full fill. |
| Full fill | Price reaches 102.0 or lower.The far boundary has been reached. Check the close separately. |
| Invalidation | A completed candle closes below 102.0.The bullish zone fails this article’s closing-price rule. |
These events can overlap. A midpoint reach is also a partial fill; a full fill can occur without a closing-price invalidation. For a bearish zone, reverse the direction.
In this guide, a bullish zone is invalidated only by a close below its lower edge, and a bearish zone by a close above its upper edge. Some traders use wicks or a midpoint break instead, which is a different rule set.
“Mitigated” is the vaguest term of all. Depending on the indicator, it can mean a touch, a midpoint reach or a full break. Check the settings before you compare a tool’s boxes with your own notes.
How to build an FVG trading plan
1. Set the context and the lifetime
Pick the market, timeframe and any trend filter first. Mark nearby support and resistance to see how much room a trade would have. Decide when an unused gap expires, for example after a set number of candles or at the end of a session.
2. Define what counts as an entry
A limit order at the edge or midpoint enters at a chosen price, before any reaction is known. The alternative is to wait.
In this guide’s confirmation model, the first return is the first candle after candle 3 whose range touches the zone. A wick touching the edge counts. That candle must then close back outside the zone in the expected direction: above the upper edge for a bullish gap, below the lower edge for a bearish one. The entry is at the next open.
If the first return does not close that way, the setup is over. A later recovery does not give you a second attempt under this model.
3. Check reward against risk at the actual entry price
Set a minimum ratio before you see the setup. For these examples, we use 1:1.5.
After the bullish reaction at R, assume a long at 104.6, a stop at 101.7 and a target at 109.4, just below a 109.6 high that was already visible.
- Risk: 104.6 − 101.7 = 2.9 points
- Reward: 109.4 − 104.6 = 4.8 points
- Ratio: about 1:1.66, which clears the filter
The stop’s 0.3-point buffer below the zone is an example, not a standard. See the risk/reward ratio guide for more on the calculation.
4. Keep the stop and the zone separate
Go back to the 104.6 entry. In an alternative continuation, a later candle drops to 101.5, through the 101.7 stop, and closes at 102.5.
Chart 04 · Hypothetical example
Fully filled gap, stopped trade, no closing break
- RReaction qualifiesLow: 103.2; close: 104.5. The original first-return condition is met.
- EEntry assumedOpen: 104.6. Dotted line: entry. Dashed red line: stop at 101.7.
- XStop crossedLow: 101.5; close: 102.5. Full fill, but no close below 102.0.
The gap has been completely filled, and the trade is stopped out, yet the zone is still valid because no candle closed below 102.0. Both statements are true at once. Assuming the stop filled at 101.7, the loss is 2.9 points, or 1R, where 1R is the amount you planned to risk. A surviving zone does not reopen the trade.
A real example: Ether, July 2026
Here are the same rules on the ETH/USD daily chart (UTC days).
- The gap (candles 1–3): candle 1 on July 2 had a high of $1,720.34. Candle 3 on July 4 had a low of $1,743.56. That leaves a bullish FVG of $23.22, with its midpoint at $1,731.95.
- A second gap below it: the July 1–3 candles left another bullish FVG at $1,642.45–$1,693.04. Stacked gaps like this are common during strong moves.
- First return (R): on July 6, ETH dipped to $1,728.97, past the midpoint, and closed at $1,797.57, well above the gap. The reaction qualified.
Real market data · ETH/USD, daily (UTC)
A real bullish FVG: a strong reaction that left no trade
- 1–3Gap, Jul 2–4Candle 1 high $1,720.34; candle 3 low $1,743.56. Width $23.22; midpoint $1,731.95.
- RFirst return, Jul 6Low $1,728.97, past the midpoint; close $1,797.57, above the gap. The reaction qualifies.
- EEntry check, Jul 7Next open $1,797.56. Stop $1,712, target $1,845: 1:0.55, below a 1:1.5 filter. No trade.
- FFull fill, Jul 8Low $1,711.90, $0.10 under the stop; close $1,742.68, inside. Not invalidated by close.
Then the trade check. The next open was $1,797.56. A stop just under the gap at $1,712 and a target at $1,845, below the June 15 high of $1,847.77, gave a risk of $85.56 and a reward of $47.44: about 1:0.55. That fails the 1:1.5 filter. No trade.
Two things happened next that make this example worth studying:
- On July 8 (F), ETH fell to $1,711.90, below the gap and $0.10 under that hypothetical stop, then closed inside the zone at $1,742.68. The gap was fully filled, but by the close rule it was still intact.
- Over the following two weeks, ETH climbed to $1,955.15.
A strong reaction pulled the entry price so far from the zone that the trade no longer made sense, and a stop placed by a common rule of thumb would have been hit by ten cents. Neither outcome says the FVG was “wrong”. They show why the entry and stop rules matter as much as the zone itself.
Inverse FVGs, balanced price ranges and order blocks
Inverse FVG (IFVG). When price closes through a gap, some traders flip its role. A bullish FVG that fails may later be watched as resistance, and a failed bearish FVG as support. The logic mirrors a breaker block. The failure alone is not an entry; the flipped zone still needs its own retest and rules.
Balanced price range (BPR). When a bullish FVG and a bearish FVG overlap in the same price area, the overlap is called a balanced price range. Price moved through it quickly in both directions, and some traders treat that overlap as a narrower, higher-interest zone. Define it the same way as the gaps: by wick boundaries, only after both three-candle patterns have closed.
Order blocks. An order block is taken from a source candle before a strong move; an FVG is the gap within that move. The two often sit next to each other, and many traders look for them together. Their boundaries come from different rules, so keep them as separate zones.
How to practice FVG trading without hindsight
Use a replay tool and mark each gap only after candle 3 closes. Write down its boundaries, midpoint, expiry and any filters. Then log the first return, your decision, fills and the exit.
Include gaps that were never revisited and trades that lost. If the entry and the stop are both reached within the same candle, you cannot tell which came first from its high and low alone; use lower-timeframe data or assume the worse outcome. A demo account is a useful place to rehearse the execution side.
