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Tier 4Lesson 16 of 20

Fair Value Gaps

Imbalances that price returns to

12 min+80 XP Find the FVG

When institutions need to fill size urgently, price moves so fast that one side of the market barely trades. That inefficiency — the fair value gap — is often revisited as price seeks to rebalance before continuing.

01The three-candle definition

Look at three consecutive candles. In a bullish FVG, candle 3’s low is above candle 1’s high: the area between them traded only one way during candle 2’s displacement. A bearish FVG is the mirror: candle 3’s high below candle 1’s low.

100.0105.0110.0CE 102.5Bullish FVG 102.0–103.0C1DisplacementC3Retest
IllustrativeCandle 1’s high is 102.0 and candle 3’s low is 103.0: a one-point gap. Price later returned into it, tagged the 50% level (consequent encroachment) and launched higher.
Consequent encroachment (CE)
(gap top + gap bottom) ÷ 2
Many traders treat a close beyond the CE as a sign the gap is failing.

02Quality matters more than quantity

Intraday charts are full of tiny gaps. Most are noise. A high-quality FVG has a reason to exist:

  • It was created by displacement — a large, decisive candle (often > 1× ATR).
  • The displacement broke structure or followed a liquidity sweep.
  • It sits in discount (for longs) or premium (for shorts) of the current dealing range.
  • It aligns with the higher-timeframe bias and forms inside a killzone.
NoteWhat the data says

We tested a mechanical “enter every FVG retest” rule on MNQ 5-minute data in the Backtester: without filters, expectancy is close to zero after costs. Adding a session filter or trend filter changes the picture — run the sensitivity grid yourself. FVGs are a location tool, not a stand-alone edge.

03Inversion FVGs

When price closes through an FVG instead of respecting it, the gap has failed. That failed gap frequently flips role — a broken bullish FVG becomes resistance on the retest. This is called an inversion FVG (IFVG), and it is a clean sign that order flow has changed hands.

Key takeaways
  • Bullish FVG: candle 3 low > candle 1 high; bearish: candle 3 high < candle 1 low.
  • CE = the 50% level of the gap.
  • Best FVGs come from displacement after a sweep, in discount/premium, aligned with HTF bias.
  • A close through an FVG can flip it into an inversion FVG.
Common mistakes
  • Trading every tiny gap on the 1-minute chart
  • Ignoring where the FVG sits in the range
  • Keeping a trade after a decisive close through the gap

Complete “Liquidity Sweeps” to unlock this challenge.

Go to Liquidity Sweeps