Fair value gaps explained: the three-candle pattern traders watch

Fair value gaps, often written FVG, are one of the most popular concepts in ICT and smart money trading. They appear in many setups, including the Silver Bullet, and are discussed across both futures and forex.

This article explains what traders mean by a fair value gap and how it is usually defined. It does not suggest that gaps predict price.

The definition

A fair value gap is a three-candle pattern. Look at the first and third candles:

• Bullish gap: the low of the third candle is above the high of the first candle. The space between them is the gap.
• Bearish gap: the high of the third candle is below the low of the first candle.

The middle candle is usually large, showing a fast move in one direction. Traders describe the gap as an area where price moved too quickly for both sides to trade, and some expect price to return to it later.

How traders use them

• As an entry area: waiting for price to return into the gap before entering in the direction of the original move.
• The midpoint, sometimes called consequent encroachment, is often used as a specific entry level.
• Inverse fair value gaps: a gap that price closes through, which some traders then treat as acting in the opposite direction.
• As context: noting where unfilled gaps sit on higher timeframes.

Why the definition has to be exact

Gaps appear constantly on every timeframe. A strategy that trades every gap would trade almost all the time, so traders add conditions: a minimum size, a requirement that the gap came from displacement, a time window, or a higher-timeframe direction. Each condition needs to be written down precisely, or two tests of the 'same' strategy will produce different trades.

There is also a timing trap. A gap is only confirmed when the third candle closes. A test that treats the gap as known while that candle is still forming is using information that was not available at the time, which is called lookahead bias. It can make a gap strategy look far better in a backtest than it could ever be in practice.

Where gap-based setups struggle

• Strong trends, where price may never return to the gap.
• Very small gaps, which can be no more than ordinary noise.
• Charts viewed after the fact, where the gaps that were respected are easy to see and the ones that failed are easy to miss.

Lemnal's validation checks for lookahead and other timing errors before a gap-based strategy is backtested. Using gaps in real trading is each trader's own decision.