Fair value gap (FVG)
A fair value gap is a three-candle pattern where a strong middle candle leaves a gap between candle 1's wick and candle 3's wick.
Key points
- Bullish FVG: candle 1's high is below candle 3's low. Bearish FVG: candle 1's low is above candle 3's high.
- The gap marks a fast, one-sided move (displacement). Price often comes back into it, but not always.
- Consequent encroachment (CE) is the 50% level of the gap.
- Better gaps come from displacement that broke structure after a liquidity sweep, in the higher timeframe's direction.
- Gaps do not have to fill. Treating every fill as certain leads to trades against the trend.
How traders use it
- Mark gaps that formed together with a break of structure.
- Wait for price to come back into the gap, or to the CE, on your entry timeframe.
- Stop beyond the swing that created the move, not just beyond the gap: gold often fills the whole gap first.
Watch out
- Marking every tiny gap on M1.
- Stops right at the edge of the gap.
- Ignoring the higher timeframe direction.
Key line: Candle 1's wick to candle 3's wick is the gap. The CE is its 50% line.