Fair Value Gap (FVG)

What is a Fair Value Gap?

A Fair Value Gap is defined by three consecutive candles where the wick of the first candle and the wick of the third candle do not overlap. The body of the middle candle leaves a visible gap on the chart. That gap is the FVG.

• Bullish FVG (BISI — Buy-side Imbalance, Sell-side Inefficiency): the low of the third candle is above the high of the first candle.
• Bearish FVG (SIBI — Sell-side Imbalance, Buy-side Inefficiency): the high of the third candle is below the low of the first candle.

Bullish vs bearish fair value gap

Fair value gap example on NQ

A typical New York AM example: NQ sweeps the previous day low in the first fifteen minutes, then a single large 1-minute candle displaces upward. Candle 1's high is 20,110, candle 3's low is 20,124 — an untraded 14-point band with a CE at 20,117. Price retraces to 20,117 within the next ten candles, holds, and runs to the previous day high. Entry at the CE, stop under 20,110, target the old high: roughly 1:4 reward-to-risk on a single fair value gap entry.

When price instead trades cleanly through the gap and closes on the other side, that same zone flips into an inverse fair value gap and becomes resistance rather than support. If the move also closed through the order block that created the gap, the reclaimed block becomes a breaker block.

What do fair value gaps indicate?

They mark inefficiency, not direction on their own. An FVG tells you where the order book was skipped, which is where unfilled institutional interest most likely rests. Direction comes from the context around it — market structure, a prior liquidity sweep, and session timing.

The logic: when price moves so fast that it skips a price range, that range was not traded fairly. Smart money tends to return there to fill orders before the move continues. The FVG marks where that return is most likely.

Why FVGs work

The mechanism is liquidity. Large orders cannot fill in a single tick — they need volume on the other side. When price runs away from value, it leaves stranded liquidity behind. The market returns to that level to fill the rest of the institutional book, then resumes direction.

This is why a 50% retracement of an FVG — the CE, or Consequent Encroachment — is the most reliable entry. By that level the imbalance has been mostly rebalanced.

How to trade a Fair Value Gap

1. Wait for a clean impulse move on the 1m or 5m NQ chart.
2. Mark the FVG: top of the first candle's wick to bottom of the third candle's wick (bullish), or inverse for bearish.
3. Wait for price to retrace into the gap. Enter at the CE (50%) line.
4. Stop loss beyond the far edge of the FVG.
5. Target the next liquidity pool — old high, old low, or session liquidity.

The strongest FVGs form inside an active ICT Killzone — London Open, New York AM, or New York PM. An FVG formed during dead hours is much less reliable.

The first FVG of the session

ICT traders pay special attention to the first presented FVG after a session opens. It often defines the directional bias for that session: if the first FVG is bullish and price respects it, the session leans long. If it's mitigated and broken, bias flips.

NQ Replay highlights this first FVG automatically on every session, with a clear mitigation indicator when price fills it.

Common mistakes

• Trading every FVG. Most are noise. Only trade FVGs aligned with higher-timeframe bias and inside a Killzone.
• Front-running the fill. Wait for price to reach the CE, not the near edge.
• No invalidation. If price closes through the far edge of the FVG, the setup is dead — get out.

How to backtest FVGs

Pattern recognition for FVGs takes hundreds of reps. The fastest way to build that without risking capital is a bar-by-bar replay. Open a historical NQ session in NQ Replay, freeze the chart at a Killzone open, and step forward candle by candle. When an FVG prints, decide if you would have entered before you reveal the next candle. Log the outcome. Twenty sessions in, the pattern reads itself.