Fair Value Gaps Explained: How to Trade FVGs Like Smart Money

What Is a Fair Value Gap?

A fair value gap (FVG) is a three-candle pattern where the middle candle is so large that a gap is left between the wicks of the first and third candles. In other words, there's a price range that only one candle traded through — creating an "imbalance" where buyers and sellers didn't properly exchange at every price level.

In ICT terminology, this imbalance represents inefficient price delivery. The market tends to return to these areas to "rebalance" — giving both sides of the market an opportunity to participate at those prices. This is why FVGs act as magnets for price.

Bullish vs Bearish FVGs

Bullish FVG: Occurs during an upward move. The gap exists between the high of candle 1 and the low of candle 3 (with candle 2 being the large bullish displacement candle). Price tends to return downward to fill this gap before continuing higher.

Bearish FVG: Occurs during a downward move. The gap exists between the low of candle 1 and the high of candle 3. Price tends to return upward to fill this gap before continuing lower.

Why Price Returns to FVGs

The institutional explanation: when large players drive price impulsively, they can't fill their entire position at one price. The FVG represents price levels where their orders weren't fully matched. The market returns to these levels to complete the order matching process — "rebalancing" the imbalance.

In practical terms, FVGs work because they represent areas of genuine institutional interest, and the market has a well-documented tendency to fill gaps and imbalances before continuing in the prevailing direction.

Consequent Encroachment (CE)

Consequent encroachment is the midpoint (50%) of a fair value gap. In ICT methodology, CE is often the most precise entry point within an FVG. Rather than entering at the edge of the gap, waiting for price to reach the CE level can provide a better risk-to-reward ratio.

The logic: if price enters the FVG and reaches the midpoint, the gap is being respected — institutions are defending it. If price pushes significantly past CE, the gap may be invalidating rather than filling. CE gives you a clear decision point.

Types of Imbalances

The ICT framework identifies several types of imbalance beyond the standard FVG:

• Fair Value Gap (FVG) — the classic 3-candle imbalance where wicks don't overlap
• Volume Imbalance — a gap between two candle bodies (not wicks) where volume was delivered on only one side
• Price Imbalance — also called an opening gap, where one candle's open doesn't overlap with the previous candle's close
• NWOG/NDOG — New Week Opening Gaps and New Day Opening Gaps are institutional-timeframe imbalances between sessions

Trading FVGs: A Practical Model

1. Identify the HTF bias — trade bullish FVGs in a bullish trend, bearish FVGs in a bearish trend
2. Find displacement — look for FVGs created by impulsive moves that break structure
3. Wait for the retrace — let price come back to the FVG rather than chasing the initial move
4. Enter at CE or OB within the FVG — if there's an order block inside the FVG, that's a high-confluence entry
5. Stop beyond the FVG boundary — if price fully violates the gap, the thesis is invalidated
6. Target the opposing liquidity — the swing high/low or external liquidity pool that price is being drawn toward

FVG + Order Block Confluence

The most powerful ICT setup occurs when an order block sits inside a fair value gap. This means you have both a zone of institutional accumulation (OB) and an area of inefficient price delivery (FVG) at the same level. When price returns to this confluent zone, the probability of a reaction is significantly higher than either concept alone.

This is why a confluence-based approach — combining multiple ICT concepts at the same level — outperforms trading any single concept in isolation.

Common FVG Mistakes

• Trading every FVG — only FVGs created by true displacement (structure-breaking moves) are worth trading
• Ignoring the premium/discount model — bullish FVGs in premium are low probability; bearish FVGs in discount are low probability
• Not tracking fill status — once an FVG is completely filled, it's no longer a valid zone
• Forgetting time context — FVGs formed during kill zones carry more weight than those formed during low-volume periods