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Key Takeaways
- A bullish FVG has candle 3 low above candle 1 high; a bearish FVG has candle 3 high below candle 1 low.
- Test three consecutive candles only after the third one closes, on the interval you trade.
- Mark the upper edge, lower edge and arithmetic midpoint, then define the retracement event.
- The example has a $0.80 band from $100.80 to $101.60 and a $101.20 midpoint.
- The pullback to $101.15 fills 56.25% of the band and holds $0.35 above the lower edge, so a midpoint-fill rule counts it and a full-fill rule does not.
What is a fair value gap (FVG)?
A fair value gap (FVG) is a three-candle pattern in which the ranges of the first and third candles do not overlap, leaving a price band between them. A bullish FVG requires candle 3's low above candle 1's high; a bearish FVG requires candle 3's high below candle 1's low. The band’s edges and midpoint become reference levels for a later retracement.
The band lies between those two outer prices. This page uses that outer-range rule, and many trading systems add their own filters on top. Fix the chart interval and session first, and test only completed candles.
Formula
Bullish FVG: L3 > H1, band [H1,L3], width L3 − H1. Bearish FVG: H3 < L1, band [H3,L1], width L1 − H3. Midpoint = (upper + lower) / 2.- Candles 1, 2 and 3 are consecutive completed candles.
- The candle 1 and candle 3 ranges set the band. A minimum size or a direction rule for the middle candle is an extra filter you add on top.
- The midpoint is the arithmetic average of the two boundaries, also called consequent encroachment in SMC terminology.
Bullish fair value gap example
On a five-minute chart, candle 1 has O $100.50, H $100.80, L $100.30 and C $100.60. Candle 2 has O $100.65, H $103, L $100.55 and C $102.90. Candle 3 has O $103.05, H $103.20, L $101.60 and C $102.60. The earlier five-minute candles averaged a $0.45 range, the baseline for the size filter.
- Bullish test: $101.60 candle 3 low > $100.80 candle 1 high
- Width: $101.60 − $100.80 = $0.80; midpoint: ($101.60 + $100.80) / 2 = $101.20
- Width / average range = $0.80 / $0.45 = 1.78, clearing a 1.5 threshold
- Retracement: ($101.60 − $101.15) / $0.80 = 56.25%; $101.15 − $100.80 = $0.35 remains to the lower edge
- Entry $101.20 and stop $100.79 give a $0.41 risk; the $103.40 target gives $2.20, a 5.37 reward-to-risk ratio
The following candle reaches $103.40. The next candle trades to $101.15 and closes at $101.70, crossing the upper edge and midpoint but staying $0.35 above the lower edge. A buy limit at the $101.20 midpoint fills on that dip. The final candle closes at $103.20 with a $103.30 high, just short of the $103.40 target.
The outer-range condition defines the band. A minimum middle-body size, direction or volume requirement is an additional filter. The 1.5 threshold makes this example reproducible; calibrate yours on the market and timeframe you trade.
Fair value gap fill: measuring the retracement
The following candle reaches $103.40. The next candle trades to $101.15 before closing at $101.70.
From the upper edge, retracement depth is $101.60 − $101.15 = $0.45. That traverses 56.25% of the $0.80 band. It crosses the midpoint by $0.05 and remains $0.35 above the lower edge.
Name the fill event before the trade: band entry, midpoint crossing or full traversal. Each has its own price reference.
How to trade a fair value gap: entry, stop and target
Enter at the $101.20 midpoint with a $100.79 stop just under the band and a $103.40 target. The stop distance is $0.41 and the target distance is $2.20, a 5.37 reward-to-risk ratio.
The final candle closes at $103.20 after reaching $103.30, just short of the $103.40 target. The trade stays open, and the $100.79 stop still caps the risk at $0.41 a share.
Use Volume Profile for traded volume by price, and for an options trade, carry the selected target and timing into the expiration, premium and volatility inputs of the Options Profit Calculator.
Bearish fair value gap example
The reflected three-candle sequence has a $103.20 candle 1 low and $102.40 candle 3 high. The bearish band is $102.40–$103.20, with midpoint $102.80.
The later retracement reaches $102.85, also traversing 56.25% from the near edge. A $102.80 short entry, $103.21 stop and $100.60 target give the same $0.41 and $2.20 distances.
Limitations of fair value gaps
- The band comes from three candles’ highs and lows. Confirm it with volume and flow at those prices before you trade it as support or resistance.
- Fix the interval first. The same move can leave an FVG on five-minute candles and none on a longer aggregation, so recompute the test when the interval changes.
- Name the fill rule before the trade. The example’s 56.25% retracement passes the midpoint but stops $0.35 short of the far edge, so a midpoint rule counts it filled and a full-fill rule does not.
- Set the size filter before marking bands. Without one, very small bands qualify; with one, a threshold such as the example’s 1.5 against the $0.45 baseline decides which bands remain.
- Keep the stop beyond the far edge. Price can traverse the whole band and keep moving, and that stop defines the planned loss.
Bottom line
A fair value gap marks a band between two non-overlapping candle ranges, giving clear edges and a midpoint to watch on a retracement. Fix the interval, size filter and fill rule before marking bands, and treat each one as a reference level with a defined stop beyond the far edge.
Clear answers
Frequently Asked Questions
Sources and Further Reading
How entries are sourced, calculated and updated: editorial methodology.