Fair Value Gap (FVG)

Definition

A Fair Value Gap (FVG) is a 3-candle price imbalance where the wicks of Candle 1 and Candle 3 do NOT overlap, leaving a gap created by Candle 2's displacement. This gap represents inefficient price delivery — an area where price moved too aggressively in one direction, and the algorithm will likely return to "fill" or "rebalance" this imbalance.

• Bullish FVG (BISI): Gap between Candle 1's HIGH and Candle 3's LOW → Price returns DOWN to fill (Buy zone)
• Bearish FVG (SIBI): Gap between Candle 1's LOW and Candle 3's HIGH → Price returns UP to fill (Sell zone)

Consequent Encroachment (CE): The 50% midpoint of any FVG — the optimal entry point within the gap.

Why It Matters

• FVGs are your PRECISION entry tool — tighter than Order Blocks
• The algorithm is programmed to return and fill imbalances
• FVGs created by displacement = Institutional footprints
• CE (50% of FVG) provides the highest probability entry within the gap
• FVGs confirm the validity of Order Blocks (OB + FVG overlap = best entry)

How It Works

Bullish FVG Formation:

1. Candle 1: Any candle (note its HIGH)
2. Candle 2: Strong BULLISH displacement candle (creates the gap)
3. Candle 3: Any candle (note its LOW)
4. Gap = Candle 1 HIGH to Candle 3 LOW (if C3 Low > C1 High = FVG exists)
5. Price returns to this gap = Buy opportunity

Bearish FVG Formation:

1. Candle 1: Any candle (note its LOW)
2. Candle 2: Strong BEARISH displacement candle
3. Candle 3: Any candle (note its HIGH)
4. Gap = Candle 1 LOW to Candle 3 HIGH (if C3 High < C1 Low = FVG exists)
5. Price returns to this gap = Sell opportunity

FVG Entry Methods:

Institutional Logic

Why FVGs exist:

• Institutional displacement is SO aggressive that price cannot deliver efficiently
• The algorithm MUST return to fill these gaps for efficient price delivery
• Unfilled FVGs act as magnets — price is drawn to them
• Filled FVGs lose their magnetic pull (already rebalanced)

FVG as entry vehicle:

• Smart Money creates FVGs during displacement
• They EXPECT price to return to the FVG before continuing
• The FVG is where they place their limit orders for re-entry
• CE (50%) is the mathematical sweet spot for institutional fills

Trading Application

Trading Bullish FVG:

1. Identify displacement UP that creates a gap (C1 High < C3 Low)
2. Mark the FVG zone (C1 High to C3 Low)
3. Calculate CE: (C1 High + C3 Low) / 2
4. Set Buy Limit at CE
5. Stop Loss: Below C1 High (or below the OB if one exists beneath FVG)
6. Target: Next BSL above

FVG Quality Assessment:

• FVG created during Kill Zone = High quality
• FVG that creates BOS/CHOCH = Institutional
• FVG within OTE zone of a larger move = Best context
• FVG on HTF (4H, Daily) = More significant than LTF FVG
• Multiple FVGs stacked = Price likely fills the deepest one

Inversion FVG:

• When a Bullish FVG gets fully traded through (becomes resistance) = Bearish signal
• When a Bearish FVG gets fully traded through (becomes support) = Bullish signal
• Inverted FVGs provide re-entry opportunities in the NEW direction

Common Mistakes

• ❌ Trading every FVG — Only trade FVGs with HTF alignment and proper context
• ❌ Entering at the edge instead of CE — CE gives better R:R
• ❌ Not distinguishing institutional FVG from retail FVG — Must have displacement + structure break
• ❌ Expecting all FVGs to fill — Some remain open (price is too strong to retrace)
• ❌ Trading FVGs against the trend — Only trade FVGs in your bias direction

Advanced Notes

• BISI (Buy-Side Imbalance, Sell-Side Inefficiency) = Bullish FVG
• SIBI (Sell-Side Imbalance, Buy-Side Inefficiency) = Bearish FVG
• Consequent Encroachment = 50% of FVG. If price trades THROUGH CE → FVG is likely to be fully filled
• Implied FVG = When wicks DO slightly overlap but bodies don't — treated as FVG because body range was inefficient
• FVG as invalidation = If price closes through the FULL FVG → Setup is invalid
• Time-based FVG = FVGs created during Kill Zones are most reliable

Example

EUR/USD — Bullish FVG CE Entry:

1. Context: 4H Bullish. 15M shows displacement up creating FVG
2. FVG: C1 High = 1.0885, C3 Low = 1.0895. Gap = 1.0885-1.0895
3. CE: (1.0885 + 1.0895) / 2 = 1.0890
4. Entry: Buy Limit at 1.0890 (CE)
5. Stop Loss: 1.0882 (below FVG / below OB beneath)
6. Target: 1.0940 (BSL above)
7. R:R: 1:6.25, +50 pips on 8 pip risk

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