Fair Value Gaps are price imbalances created by rapid displacement where the auction “skips” levels and leaves a void. Traders watch these zones for retests (mitigation) and continuations.
Definition (fast)
- FVG (3-candle pattern):
- Bullish: Candle A high < Candle C low (with strong Candle B in between).
- Bearish: Candle A low > Candle C high. The space between those prices is the FVG (imbalance).
- They signal temporary supply–demand imbalance and often get revisited.
Note: On 24/5 futures there may be fewer “hard” gaps. FVGs still exist as inefficiencies even when candles overlap; use the 3-candle logic.
How to Identify & Draw
Spot a displacement candle (large impulse).
Check candles on either side (A and C).
If A high < C low (bullish) → draw a rectangle from C low (bottom) to A high (top).
Mark the 50% line (mid). Many mitigations tag 33–50% before continuation.
Why FVGs Matter
- Imbalance: Proof of one-sided aggression.
- Mean reversion & continuation: Price often retests to rebalance, then resumes.
- S/R behavior: FVGs can act as support (bullish) or resistance (bearish).
- Trend strength: Large FVGs aligned with trend = strong participation.
Two Core Ways to Trade FVGs
A) Continuation “Mitigation” Entry (with the trend)
Context: Trend day or initiative drive.
Plan:
- Wait for price to pull back into 33–50% of the FVG.
- Look for confluence (VWAP/bands hold, LVN/POC edge, order-flow absorption).
- Stop: Beyond the far edge of the FVG (where thesis fails).
- Targets: Prior swing, opposing imbalance, or measured move (seek ≥2R).
B) Mean-Reversion “Fill” (countertrend, lower frequency)
Context: Extended move into exhaustion; FVG forms at extremes.
Plan:
- Fade back into the FVG only with strong reversal evidence (failed break, delta shift).
- Stop: Beyond the extreme wick/excess.
- Targets: 50% → full fill → VWAP/POC. Keep size smaller than trend trades.
Confluence That Improves FVGs
- VWAP / Anchored VWAP: FVG aligning with fair value tests.
- Volume Profile: LVNs (low-volume nodes), POC, VAH/VAL.
- Liquidity/Levels: ONH/ONL, prior H/L, IB edges.
- Order Flow: Delta surges, absorption at mid/edge of FVG.
Invalidation & Management
- A gap is mitigated once price fully trades through it with acceptance (closes through).
- Multiple retests degrade the edge.
- Trail stops using structure (higher lows or band/VWAP holds), not on fear.
Quick Checklist
Clear 3-candle FVG? Direction?
Context: Trend or balance? News risk?
Entry plan: 33–50% mitigation or reversal evidence for fill.
Stop at invalidation; target ≥2R (opposite imbalance/POC/VWAP).
Confluence: VWAP, profile levels, order flow.
Log R, MAE/MFE, rule adherence.
Bottom line: FVGs map where the auction moved too fast. Trade them with context and confluence, manage risk at the far edge, and let the 50% rule and ≥2R targets shape your execution.