A fair value gap (FVG), also called an imbalance, is a three-candle pattern in which the market moved so quickly in one direction that the first and third candles do not overlap. The space between them is a range where little or no trading took place on the way through.
How to identify a bullish FVG
Take three consecutive candles. If the low of the third candle is above the high of the first candle, there is a gap between them. The middle candle is usually a large, fast move. The gap is the range from the first candle's high to the third candle's low.
A bearish FVG is the mirror: the high of the third candle is below the low of the first.
Why traders watch them
The idea is that when price moves very fast, orders on one side were absorbed and the other side did not get a fair chance to trade. Some traders expect price to return to that range at some point, and treat it as an area of interest. That is a hypothesis you can test, not a rule of nature.
A zone, not an exact price
Because the gap is a range, treat it as a zone. Price may fill only part of it, overshoot it, or never come back. Defining in advance what counts as "price reacting to the zone" keeps you honest.
What an FVG is not
- It is not the same as a price gap on the chart, such as the gap between Friday's close and Monday's open.
- It is not a guarantee that price will return, or that it will reverse when it does.
- It is not useful in isolation. Context matters, which the next lesson covers.