Fair Value Gap (FVG)
The three-candle imbalance, how to mark it, where to enter, and what an inversion FVG means.
A Fair Value Gap (also called imbalance) is a three-candlestick pattern where the wick of candle 1 does not overlap the wick of candle 3. That leaves a gap on the middle candle: the FVG. It marks an inefficient, fast move that price often returns to 'rebalance.'
How an FVG forms
For a bullish FVG (BISI: buy-side imbalance, sell-side inefficiency), mark the high of candle 1 and the low of candle 3. The space between them is the gap. A bearish FVG (SIBI: sell-side imbalance, buy-side inefficiency) is the mirror: the low of candle 1 and the high of candle 3.
An impulsive up-move prints three candles fast. The middle candle barely overlaps the ones around it.
Spot it: A fast 3-candle burst is where to look for the gap.
Entry, stop, target
Enter at the high of a bullish FVG (or its 50%), not at the very bottom, or a fast move can leave you behind. Place the stop loss at the swing low (or the candle body / order block), and target 1:2, a higher win-rate target that protects your psychology as a beginner.
FVG vs. volume imbalance vs. opening gap
Don't confuse these: a fair value gap is the gap left in the MIDDLE of three candles (wicks do not overlap). A volume imbalance is a gap between two candle BODIES (the wicks still overlap). An opening gap is a true gap between candles (common on indices and over forex weekends). As a beginner, focus on the FVG. It's what we mostly use.
When there is NO FVG
If candle 1 and candle 3 overlap (their wicks share price), there is no gap, so there is no FVG. The wicks must NOT overlap for a valid FVG.
Inversion FVG
Sometimes price doesn't respect an FVG. If a candle body closes through the FVG (e.g. closes below a bullish FVG's low), the FVG is 'disrespected' and inverts: a former support area now acts as resistance. Price may retrace back into it and then continue in the new direction. A wick through it is okay. It's the body close that signals the inversion.
Don't blindly set limit orders
Don't drop a limit order at every FVG. An FVG is a point of interest (a PDRA), not a guaranteed entry. Drop to a lower timeframe and look for confirmation first, which we cover in the top-down analysis topics.
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