Identifying fair value gaps
Day 12 of 26 · 9 min read · By DT Terminal
A fair value gap is a three candle pattern where a strong middle candle leaves a space between the wicks of the candles either side of it. This lesson shows how to find one, how it is commonly marked, and what traders usually watch for when price returns to it.
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Three candles, wick to wick
A fair value gap (FVG) is a price range one strong candle moved through so fast that the candles on either side of it never overlap.
Read three candles in a row. Candle 2 is the move. Candles 1 and 3 are the edges, and you compare their wicks, not their bodies.
- Bullish: candle 3's low is above candle 1's high.
- Bearish: candle 3's high is below candle 1's low.
Go deeper
Why the name. Only candle 2 traded the prices inside the gap. Neither candle 1's range nor candle 3's covers them, so the market spent very little time there and almost all of the trading went one way: price moved through without settling on what it was worth.
Not a weekend gap. Price did trade every level in the range, and a line chart shows no hole. A weekend gap, where Monday opens away from Friday's close, is a different thing.
New to single candles? Start with Day 2.
Why price often comes back
After a gap forms, price often trades back into it later. Traders call this rebalancing, or filling the gap: the market returns to prices it rushed through, and both buyers and sellers get to trade there.
It is a tendency, not a law. Some gaps are revisited within a few candles, some days later, and some never.
In an uptrend, a bullish gap left by a strong move is where some traders look for a pullback to hold before the move carries on.
Go deeper
Gaps and demand zones. It is the same idea as a demand zone in Day 11, and the two often sit together: the zone is where the move started, and the gap is the trail it left on the way out.
The midpoint, or consequent encroachment
Many traders mark the gap's midpoint, the 50% level halfway between its edges. ICT traders call it consequent encroachment, or CE. To find it, add the two edges and halve the sum.
On this illustrative NAS100 M15 chart, candle 1 tops out at 24,818.91 and candle 3 bottoms at 24,879.86. That is a 60.95 point gap with its midpoint at 24,849.39. The pullback trades down to 24,834.98, past the midpoint, without a close below the gap.
DT Terminal ChartsNAS100 · M15Bullish FVGGo deeper
Measuring a fill. Measure from the side price returns from: down from the top of a bullish gap, up from the bottom of a bearish one. For a bullish gap the fill is the top minus the deepest price, divided by the top minus the bottom, capped at 100%. For a bearish gap, swap the sides: the highest price minus the bottom, over the same size.
On the chart above the pullback went 73.6% of the way through the gap.
Filled, or inverted
How far price comes back decides what is left of the gap.
- Partial fill: price traded in, but not all the way through.
- Full fill: price reached the far edge or went past it. Many traders treat the gap as used.
- Inverted: a candle closed beyond the far edge.
After an inversion, many traders read the range the other way. A bullish gap that price closed below is watched as resistance from underneath: an inverted fair value gap, or IFVG.
Fair value gaps
Bullish and bearish, from untouched to inverted
- Fair value gap
- Midpoint
Bullish gap
candle 3's low above candle 1's high
Bearish gap
candle 3's high below candle 1's low
Untouched
price has not traded back in
Partial fill
back to the 50% midpoint
Full fill
traded to the far edge; often treated as used
Inverted
a close beyond the far edge; read the other way
Go deeper
Structure. If the close through a bullish gap also breaks the last higher low, that is the market structure shift from Day 10. Still a level to watch, not a promise: inverted gaps fail too.
Interactive tool
Gap fill explorer
This interactive tool runs in the app, with your own numbers.
Which gaps matter
Any fast candle on any timeframe leaves a gap, so a chart is full of them. Traders who use gaps filter them with the same few questions.
- Does it agree with the structure?
- Did a strong move leave it, ideally one that broke a swing high or low?
- Is it still open?
- Is it clearly bigger than the candles around it, on your timeframe or higher?
Go deeper
A fair value gap marks a place price might react. The swing highs and lows tell you which reaction to expect.
| Check | Usually gets attention | Usually ignored |
|---|---|---|
| Direction | With the structure: a bullish gap in a run of higher highs and higher lows | Against the structure, or inside a range with none |
| The move | Left by a strong move that broke a swing high or low | Left by an ordinary candle in the middle of chop |
| Freshness | Not yet filled | Already fully filled |
| Location | At the start of a move out of a supply or demand zone | Far from any level that matters |
| Size | Clearly larger than the candles around it | A sliver a few ticks wide |
| Timeframe | On the timeframe you analyse, or higher | Tiny M1 gaps when you read H1 |
The direction comes first, and it comes from structure, not from the gap. A bullish gap in a downtrend is mostly a place where a pullback might pause on its way lower.
Tagging gap trades. Give every trade you take at a gap the same tag, such as FVG, and a second one for what the gap had done when you entered: untouched, partial or inverted. Filter the Trade Log by those tags and by Outcome to see which kind of gap your wins and losses came from.
Pull up every gap trade
FVG, plus untouched, partial or inverted. Filter the Trade Log by those tags and Outcome.Worked examples
Worked example
Example 01: NAS100 M15: a bullish gap, filled on the retest
The worked example, with every number walked through, is in the app.
Two more: a partial fill and an inversion
Worked example
Example 02: XAUUSD H1: a bearish gap, only half filled
The worked example, with every number walked through, is in the app.
Worked example
Example 03: EURUSD H1: a bullish gap that inverts
The worked example, with every number walked through, is in the app.
The working for each example
Example 1. Candle 3's low, 24,841.00, is above candle 1's high, 24,812.50, so the three candles leave a bullish gap.
Size: 24,841.00 minus 24,812.50 = 28.50 points. Midpoint: (24,841.00 + 24,812.50) / 2 = 24,826.75.
Later in the session price pulls back. The retest candle trades down to 24,810.25, 2.25 points below the gap's bottom, so the whole gap is traded: a full fill, 100.0%. It closes at 24,833.00, 20.50 points above the bottom, so it did not close through.
Example 2. Candle 3's high, 4,041.20, is below candle 1's low, 4,052.80, so this is a bearish gap from 4,041.20 up to 4,052.80.
Size: 4,052.80 minus 4,041.20 = 11.60. Midpoint: 4,047.00.
Price rallies back, and the highest the return reaches is 4,046.90. Measured up from the bottom: 4,046.90 minus 4,041.20 = 5.70, and 5.70 / 11.60 = 49.1%. A partial fill, stopping 0.10 short of the midpoint.
Example 3. Candle 3's low, 1.16485, is above candle 1's high, 1.16420. The bullish gap is 0.00065, which is 6.5 pips.
The next day a bearish candle closes at 1.16390, 3.0 pips below the gap's bottom. That is a close through the far edge, so the gap has inverted: from here many traders read 1.16420 to 1.16485 as resistance.
Price then climbs back from below. The retest reaches 1.16452, which is 3.2 pips into the old gap, or 49.2% of it measured from the bottom, and the candle closes at 1.16418, back below it.
Practise it in the backtester
NAS100 M15. At each strong candle, pause, mark the gap from candle 1's wick to candle 3's, and note what happened: untouched, partly filled, filled or inverted.Check yourself
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Quiz
Check yourself: 3 questions
Answer each question and see why it is right, in the app.