Spot Better Trade Entries With Fair Value Gaps
14 August 2025
5 Mins Read
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Fair value gaps represent a critical concept for price action trading since they highlight moments in which the market can move rapidly, and this results in price inefficiencies.
Many traders incorporate fair value gaps into their strategies to identify potential entry points with a higher probability of success.
This article will provide a structured overview of fair value gaps, discuss how to spot them, and explain practical ways of using fair value gaps for entry points to enhance your trading decisions.
What Are Fair Value Gaps?
Fair value gaps occur when price moves sharply in one direction. Market participants did not fully transact in those chart areas, so these gaps were created.
These gaps reflect temporary imbalances between supply and demand, often caused by powerful buying or selling activity, typically by large institutional players.
Prices will often revisit these gaps so as to “fill” the inefficiency before continuing along their trend, for the market tends to seek equilibrium.
The Fair value gaps have three specific candles. The middle one usually moves a lot. As for the first and third candles, they do not touch one another. There is typically a space between the wicks, which is known as the gap.
Now, there are two specific types of Fair value gaps based on the pricing movements.
In A Bullish FVG
This especially occurs when the pricing is going up. The high rate of the first candle and the low of the third candle is the gap here. The price often comes back down in order to fill the gap before it goes up again.
In A Bearish FVG
The bearish FVG occurs when the pricing goes down. The low rate of the first candle and the high of the third candle are the main gaps here. Now, to fill the gap, the price goes up before it drops again!
How To Identify Fair Value Gaps
FVGs specifically follow a pattern of three candles in a row. Thus, fair value gaps are mainly identified by observing a specific three-candle pattern on a candlestick chart:
- The Candle One: Initiates a price range.
- Now, Candle Two: A large momentum candle that causes a rapid price move.
- Lastly, Candle Three: Confirms the gap by not overlapping with Candle One’s range.
If the wicks of Candle One and Candle Three do not overlap, a fair value gap exists between them. This unfilled space represents an area where the price did not trade efficiently.
For the bullish FVG, the low of the third candle always stays higher than the high of the first candle. On the other hand, when it comes to bearish FVG, the third candle needs to be higher than the first candle.
Types Of Fair Value Gaps
Fair value gaps typically come in two forms:
- Bullish Fair Value Gap: Occurs when strong buying pressure pushes prices upward rapidly, leaving a gap below price action. This signals potential continued upward momentum.
- Bearish Fair Value Gap: Forms during intense selling pressure, creating a gap above price action, signaling potential downward momentum continuation.
Understanding these types helps traders anticipate the probable movement and decide whether to enter long or short positions.
Using Fair Value Gaps For Entry Points
One of the most valuable aspects of fair value gaps is their potential as entry points. The market often returns again to fill these gaps, as they signal inefficiencies.
Traders act upon this characteristic. They begin trades once the price returns to the gap zone.
There are several common strategies for entry:
- Retracement Entry: Wait for the price to pull back to the edge of the gap and enter as it begins to reverse.
- Confirmation Entry: Look for confirmation signals like reversal candlestick patterns or momentum shifts within the gap before entering.
- Aggressive Entry: For experienced traders, placing limit orders directly inside the gap anticipates the filling.
Traders are allowed to enter with tighter stops along with better-defined risk whenever they use fair value gaps as entry points, because the gap boundaries form natural levels of support or resistance.
Combining Fair Value Gaps With Other Tools
For stronger trade setups, many traders combine fair value gaps with other concepts of smart money, such as order blocks or break of structure signals.
Confirming repeatedly the institutional interest existing at these levels improves the odds for successful trades.
For example, a fair value gap that coincides with an order block creates a more powerful entry point.
Key players have built up positions in this zone, making for a particularly effective setup. This double confirmation guides more clearly, with the capability to manage risk better.
Timeframe And Reliability
Fair value gaps may be seen from intraday charts to weekly charts on any timeframe.
Gaps that are on higher timeframes, such as 4-hour or daily charts, are, in general, more reliable.
They represent stronger institutional activity, and also market imbalances are in fact more meaningful on these timeframes.
For shorter-term trading strategies, smaller timeframes can still be useful, but they may also produce more false signals.
Risk Management When Trading Fair Value Gaps
While fair value gaps can be powerful tools, risk management is important for people to implement.
Price can shift unpredictably because of market news or sentiment shifts, plus not every single gap gets fully filled.
Stop-loss orders beyond gap boundaries can manage risk effectively via placement. Stop-loss orders can also be placed using recent swing highs/lows.
Insights From Tradervue
A respected authority in the trading community stresses that fair value gaps should not be traded alone.
Their perceptions suggest that identifying a gap is only the first step.
When traders recognize gaps and combine indicators, then they succeed through analysis of market context for high-probability trades.
Price reactions refine entry timing more when nearing gap zones.
This also reduces risk. Learning how to spot and using fair value gaps, mastering fair value gaps can add confidence and precision to your trading toolkit.
These inefficiencies act as useful guides for possible turning points within the market. They are integrated into a thorough strategy for sound risk management.
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