A bullish FVG forms when:

Candle 1 high is below candle 3 low. The gap sits between the high of candle 1 and the low of candle 3.

What often happens after an FVG forms?

Price often retraces into the gap before continuing. Retracements into the gap are common, but not guaranteed.

If a candle body closes fully through the gap, you should:

Accept the idea failed and respect your stop. A full close through the gap invalidates it.

Strategies School / ICT / Smart Money Concepts

Fair Value Gaps (Imbalance)

Intermediate · 8 min read

Spot three-candle imbalances and use the gap as a retracement entry zone.

What it is

A bullish fair value gap (FVG) forms when candle 1 has a high below the low of candle 3. The space between them was not traded in both directions, leaving an imbalance.

Price often retraces into the gap, for example to its midpoint, before continuing. Sometimes it fills the entire gap and fails. Treat it as a zone, not a line.

A bearish FVG is the mirror image: the low of candle 1 above the high of candle 3.

How to spot it

Look for a large displacement candle.
Check the candle before and after: is there a space between candle 1 and candle 3 wicks?
Mark the gap from the high of candle 1 to the low of candle 3 (bullish).
Prefer gaps that formed with a break of structure.

Trade plan

Entry: On a retrace into the gap, often at or near its 50% level, with a reaction.
Stop loss: Beyond the start of the gap or the swing that created it.
Target: The high of the move or the next liquidity pool.

Common mistakes

Wrong: Trading every small gap on every timeframe. Right: Use gaps created by strong displacement and break of structure.
Wrong: Assuming a gap must fill and then bounce. Right: A gap fully closed by a body means the idea failed. Respect your stop.

Pro tip: Combine a gap with an order block or the OTE zone. Overlapping zones give a more selective entry.

Quiz

A bullish FVG forms when: Answer: Candle 1 high is below candle 3 low. The gap sits between the high of candle 1 and the low of candle 3.
What often happens after an FVG forms? Answer: Price often retraces into the gap before continuing. Retracements into the gap are common, but not guaranteed.
If a candle body closes fully through the gap, you should: Answer: Accept the idea failed and respect your stop. A full close through the gap invalidates it.

Educational content, not financial advice. Diagrams are illustrations, not real market data.