What is a Fair Value Gap (FVG) in Forex Trading

A Fair Value Gap (FVG) is a price imbalance left on the chart when the market moves so fast in one direction that it skips over a range of prices. Smart Money traders watch these gaps closely because price has a habit of coming back to them before continuing its move. In this post, we'll cover what an FVG is, how to spot it using three candles, and the difference between bullish and bearish FVGs.

What is a Fair Value Gap

When buyers or sellers become very aggressive, price moves in one strong push and does not trade back and forth at every level. This leaves a section of the chart where only one side was active. That unbalanced area is called a Fair Value Gap, or imbalance. The market sees it as "unfairly priced", so it often returns to rebalance it later.

How to Identify FVG (3-Candle Rule)

FVG always involves three consecutive candles:

1. Candle 1: The candle before the big move.
2. Candle 2: The large, impulsive candle that creates the imbalance.
3. Candle 3: The candle after the move.

The gap is the empty space between the wick of Candle 1 and the wick of Candle 3. If those two wicks do not overlap, the space between them is the Fair Value Gap.

Bullish FVG

A bullish FVG forms during a strong upward move. The gap sits between the high of Candle 1 and the low of Candle 3. Because buyers dominated this move, price often dips back into this zone later, and the gap can act as support before the rally continues.

Bearish FVG

A bearish FVG forms during a strong downward move. The gap sits between the low of Candle 1 and the high of Candle 3. Because sellers dominated this move, price often rises back into this zone later, and the gap can act as resistance before the drop continues.

Why Price Returns to FVG

Since the gap was formed by one-sided buying or selling, many orders in that area were left unfilled. When price comes back, those pending orders get a chance to execute, which is why you often see a reaction or bounce from the zone.

Key Takeaway

A Fair Value Gap is simply an area of imbalance created by a fast, one-directional move. Learn to spot the three-candle pattern, mark the gap between the wicks of Candle 1 and Candle 3, and watch how price reacts when it returns to that zone.

Risk note: Forex trading involves substantial risk of loss and is not suitable for every investor. This content is for educational purposes only and should not be considered financial advice. Always use proper risk management and trade with capital you can afford to lose.