Fair Value Gaps: Inefficiency and Return

Fair Value Gaps are price inefficiencies created when the market moves too quickly. Learn how institutions use these gaps and why price frequently returns to fill them.

A Fair Value Gap (FVG) is a three-candle pattern where the middle candle moves so aggressively that it creates a price region that was never traded — a gap between the high of the first candle and the low of the third candle, with the middle candle spanning that entire space without any opposing price action.

Why gaps form

FVGs form when institutional order flow overwhelms the available liquidity at a given price level. The market effectively jumps over a price zone because all available sellers (in a bullish FVG) or buyers (in a bearish FVG) were consumed at once. The gap represents a price region that had no two-sided trading — and markets are efficient over time, meaning they will return to reprice these zones.

How traders use them

The most common application is using a FVG as a high-probability entry zone on a retracement. After a bullish impulse creates a FVG, a pullback into the gap's equilibrium point (50%) is treated as a potential entry location for the next leg higher. The reasoning is that the institutional order flow that created the gap is likely to defend that zone on the return.

Not all FVGs hold. The strength of the candle that created the gap, its location relative to higher timeframe structure, and the session context all determine whether it is likely to act as support or resistance on the return.

The fill vs the reaction

Markets do not always fill FVGs completely. A partial fill into the 50% level is often sufficient to find the level and reverse. Waiting for a complete fill before acting is a common mistake — by the time the gap is filled, the entry quality has often deteriorated significantly. The reaction at the gap, not the fill itself, is what matters.