A fair value gap (FVG) is a three-candle pattern in which the wicks of the first and third candles do not overlap, leaving a range of prices the market crossed in one fast move. Traders mark that range as a zone price may revisit and use it to plan entries, stops and targets.
In short
- A bullish fair value gap forms when the low of candle 3 is above the high of candle 1. The gap runs from candle 1's high up to candle 3's low.
- A bearish fair value gap forms when the high of candle 3 is below the low of candle 1. The gap runs from candle 3's high up to candle 1's low.
- An inverse fair value gap is a gap that price has closed through. Traders then expect it to act the opposite way: a failed bullish gap as resistance, a failed bearish gap as support.
- Gaps do not always fill. Traders use them alongside the trend and a fixed stop, because a gap says where to look and nothing about direction.
- On a $10,000 Classic account, a 20-pip stop on 0.5 lots of EUR/USD risks $100, one fifth of the $500 daily loss limit.
How do you identify a fair value gap?
Take any three candles in a row and compare the wicks of the first and the third. If they do not overlap, the price range between them is a fair value gap. The middle candle is usually large and moves hard in one direction, and that speed is what leaves the space behind.
Measure from the wicks (the highs and lows), because the rule ignores candle bodies. If the two wicks overlap by even a pip, there is no gap. Many traders also skip gaps that are tiny next to the instrument's normal candle size, since a 1-pip gap on a 5-minute chart is usually noise.
Bullish fair value gap
A bullish FVG forms during a sharp rise. Say candle 1 has a high of 1.0850 and candle 3 has a low of 1.0870. The 20 pips between them, from 1.0850 to 1.0870, is the gap, and traders watch it as possible support if price pulls back.
Bearish fair value gap
A bearish FVG forms during a sharp fall. Say candle 1 has a low of 1.0920 and candle 3 has a high of 1.0905. The 15 pips from 1.0905 to 1.0920 is the gap, watched as possible resistance if price rallies.
The halfway price of a gap has its own name in ICT teaching: consequent encroachment. In a 1.0850 to 1.0870 gap it is 1.0860. Some traders place limit orders there, and some read a candle body closing beyond it as a sign the gap is weakening.
| Bullish FVG | Bearish FVG | Inverse FVG | |
|---|---|---|---|
| Forms during | A sharp rise | A sharp fall | A move that closes through an older gap |
| The test | Candle 3 low above candle 1 high | Candle 3 high below candle 1 low | A candle body closes beyond the gap's far edge |
| Gap runs from | Candle 1 high to candle 3 low | Candle 3 high to candle 1 low | The same box as the original gap |
| Traders watch it as | Possible support on a pullback | Possible resistance on a rally | The opposite role to the original gap |
Why do fair value gaps form, and why might price return?
Fair value gaps form when orders pile up on one side, often on a data release or at a busy session open, and price moves through several levels before the other side responds. The usual explanation for a return is that orders left unfilled in that range pull price back. It is a working theory, and it fails often enough that every gap trade needs a stop.
The term was popularised by Michael J. Huddleston, who teaches as the Inner Circle Trader (ICT). His idea is that inside the gap price was offered in one direction only, so there was no fair two-way auction. Every trade still had a buyer and a seller; the gap shows that one side was willing to pay up quickly.
Traders who missed the move may leave buy orders inside a bullish gap, and traders who sold into the rise may buy back there to cut their loss. If enough of them are waiting, price reacts when it returns. If they are not, it slices through.
An ordinary price gap is a different thing: the open of one session sits away from the close of the last, which you see mostly in shares and, in forex, over the weekend. An FVG forms during continuous trading.
What is an inverse fair value gap?
An inverse fair value gap (IFVG) is a fair value gap that price has broken through and closed beyond. Traders then expect the same zone to act in the opposite role. A bullish gap that fails becomes possible resistance, and a bearish gap that fails becomes possible support.
The usual test is a candle body that closes beyond the far edge; a wick poking through does not count. With a bullish gap from 1.0850 to 1.0870, a 15-minute candle closing at 1.0838 converts it. From then on, traders look to sell if price rallies back into 1.0850 to 1.0870.
The reasoning is about trapped positions. People who bought inside the gap are now losing, and when price comes back to their entry some of them sell to get out flat. That selling can turn the old support into resistance. Traders often read an inverse gap as an early sign that a trend has turned, since a zone that should have held gave way.
How do traders use fair value gaps?
In fair value gap trading, you wait for price to come back to a gap that formed with the trend, enter inside it, put your stop beyond the gap and aim for the most recent swing high or low. The gap supplies the location, and your written rules decide whether you take the trade.
Most methods take bullish gaps only in an uptrend (higher highs and higher lows) and bearish gaps only in a downtrend. A gap left by the move that broke the last swing high or low usually carries more weight than one formed in the middle of a range.
A limit order at the near edge of the gap fills most often but needs the widest stop. A limit at the midpoint gives a tighter stop and fills less often. Waiting for a reversal candle inside the gap costs a few pips of entry price and screens out some failures.
The stop goes beyond the far edge of the gap or beyond the extreme of candle 2, with a few pips of buffer for the spread. For the target, traders use the swing the move created or an unfilled gap in the opposite direction, so gaps serve as targets as well as entries. Many mark gaps on the 1-hour or 4-hour chart and time the entry on the 5- or 15-minute chart.
Do fair value gaps always get filled?
No. Some gaps fill completely, some only partly, and some are never revisited, especially in a strong trend where price keeps going. Treat any fill percentage you see quoted with suspicion unless you can see how it was measured, and test the idea on your own charts before you rely on it.
A gap is usually treated as invalid once a candle body closes beyond its far edge. Traders then watch it as a possible inverse gap and stop buying it.
Plan for these limits:
- Low timeframes produce dozens of gaps a session, and most lead nowhere.
- The edges involve judgement: wicks or bodies, a minimum size, and whether a partial fill uses the gap up.
- Gaps formed on news can be 40 pips wide or more, which means a wide stop and a smaller position.
- On small gaps the spread can be a large share of the gap.
- Looking back, the gaps that held are easy to spot. Live, you do not know which ones will.
What does a fair value gap trade look like with real numbers?
Here is a bullish FVG trade on a 15-minute EUR/USD chart, sized for a $10,000 account risking 1% per trade. One standard lot of EUR/USD moves $10 per pip, so half a lot (0.5 lots) moves $5 per pip. The trade risks $100 to make $200, and the second half shows what happens when the gap fails.
- Spot the gap. Candle 1 has a high of 1.0850. Candle 2 is a large bullish candle with a low of 1.0844 and a high of 1.0885, breaking the previous swing high at 1.0875. Candle 3 has a low of 1.0870. The gap runs from 1.0850 to 1.0870, 20 pips, with a midpoint of 1.0860. Price goes on to a swing high at 1.0900.
- Place a buy limit order at the midpoint, 1.0860.
- Set the stop at 1.0840, below candle 2's low of 1.0844 and 10 pips under the gap. That is 20 pips of risk.
- Set the target at the 1.0900 swing high, 40 pips away. Reward to risk is 2:1 (our risk-reward ratio guide explains the ratio).
- Size the position. 1% of $10,000 is $100, and $100 divided by (20 pips × $10 per pip per lot) is 0.5 lots.
- At the target you make 40 × $5 = $200. At the stop you lose 20 × $5 = $100.
Those figures are before costs. Simulated trades carry trading costs, as they would on a live account: a commission when a trade opens and when it closes, a price markup on some symbols, and holding costs on positions kept overnight.
Now suppose the gap fails. Price drops, your stop at 1.0840 is hit for a $100 loss, and a 15-minute candle closes at 1.0838, below the gap's bottom edge of 1.0850. The 1.0850 to 1.0870 box is now an inverse FVG. Price falls to 1.0825, then rallies back. You sell at 1.0860 with a stop at 1.0880 (10 pips above the box) and a target at 1.0820: the same 20 pips of risk at 0.5 lots, so $100 at risk for a $200 target.
How this works on CMC Funded
On CMC Funded, the daily loss limit sets how many failed gap trades you can take in a day. On a $10,000 Classic account the limit is $500 on the first day, 5% of that day's starting equity. On a $10,000 Direct account it is $400, 4%. Both are measured on equity, so losses on open positions count as well as closed ones.
If the long and the short in the example both hit their stops, the day's loss is $200 before costs: 40% of the Classic limit and half of the Direct one. The limit is worked out afresh each day as a share of your equity at the start of that day, so it moves with your account: larger after a good day, smaller after a losing one. An unused allowance does not carry over, and reaching the limit ends the account with no warning stage. The daily loss and maximum loss lesson covers how the two limits interact.
Because open positions count, your running total matters before a trade closes. With the long already lost and the short 15 pips against you, the floating loss is 15 × $5 = $75, so you are down $175 for the day with only $100 closed.
| Risk per trade on $10,000 | Classic $10K, first-day daily limit $500 | Direct $10K, first-day daily limit $400 |
|---|---|---|
| 0.5% ($50) | 10 full stop-outs reach it | 8 full stop-outs reach it |
| 1% ($100) | 5 full stop-outs reach it | 4 full stop-outs reach it |
| 2% ($200) | The 3rd stop-out goes past it | 2 full stop-outs reach it |
These counts are before costs and slippage, which bring the limit closer. The leverage you choose at purchase, from 1:10 to 1:500, changes how much margin a 0.5-lot position ties up; the position still moves $5 a pip. Higher leverage magnifies both gains and losses.
There is no time limit, so you can wait for a gap that meets every rule. News trading is allowed, but a gap formed on a data release is often wide, so plan for a wider stop and a smaller size. For scale, the Classic Phase 1 profit target is 8%, or $800 on $10,000: four of the $200 winners above with no losses.
Common mistakes
- Trading every gap you see. Take only gaps that formed with the trend, in the move that broke a swing high or low.
- Measuring gaps from candle bodies. The rule uses the wicks of candles 1 and 3.
- Putting the stop inside the gap, where a normal pullback to the far edge takes you out just before the move you wanted. Put it beyond the gap or beyond candle 2's extreme.
- Sizing by lots instead of by risk. One lot on a 20-pip stop risks $200, while one lot on a 40-pip news gap risks $400, the whole daily limit on a $10,000 Direct account. Work out the size from the stop every time.
- Buying the same gap again after a body closes through it. Treat it as a possible inverse gap or leave it alone.
- Ignoring the spread on small gaps, where a 2-pip spread is a fifth of a 10-pip gap.
Questions traders ask
Are FVG and imbalance the same?
Many traders use the two words for the same thing. In ICT terms, a fair value gap is the wick-to-wick space across three candles. A volume imbalance is narrower: a space between the bodies of two neighbouring candles whose wicks still overlap. Both describe a fast, one-sided move, and traders treat both as zones.
Which timeframe works for fair value gaps?
Gaps appear on every timeframe. The 1-hour and 4-hour charts produce fewer, wider gaps that more traders are watching. The 1- and 5-minute charts produce many small ones, where spread and noise eat into the edge. A common approach is to mark gaps on a higher timeframe and time entries on a lower one.
How do fair value gaps relate to order blocks?
An order block is the last opposite-coloured candle before a sharp move, such as the final down candle before a rally. The fair value gap is the space that rally leaves behind. The two often sit side by side, so traders read them as one area. Both ideas grew out of supply and demand trading.
Is FVG trading a good strategy?
A fair value gap marks a price area, and the trade direction comes from the trend and your other rules. Traders who get consistent results use gaps as one filter in a written plan, with a fixed stop and sizing by risk. Taken alone, gaps produce many signals and many failures, so test your rules on past charts first.
Next steps
The Academy lesson on supply, demand and fair value gaps walks through marking gaps on practice charts. Work out each trade's size from its stop with the position size calculator, and check the daily loss limit and the other limits on the rules page.
You can compare the Classic and Direct routes on the challenges page.