Fair Value Gap

The three-candle definition

Take any three consecutive candles. If the high of the first does not reach the low of the third in an upward move — or the low of the first does not reach the high of the third in a downward move — the space between them is a fair value gap.

The middle candle moved far enough, fast enough, that price barely transacted in that range. Almost all of the activity happened on one side, which is why the area is also called an imbalance or inefficiency.

Why traders watch them

The working assumption is that markets tend to revisit ranges that were skipped, filling in the two-sided trade that never happened. Plenty of gaps go unfilled for a long time, so this is a tendency to observe rather than a rule to rely on — but it makes the gap a reasonable place to expect a reaction on a pullback.

Practically, a fair value gap gives a pullback destination. In a trend, price often retraces into the nearest unfilled gap before continuing, which turns a vague 'wait for a pullback' into a specific area with a specific invalidation point.

How to apply it

A partial fill is common. Price often trades into the top third or half of a gap and turns from there, so waiting for a complete fill can mean missing the move entirely. Some traders use the midpoint of the gap as the working level for exactly this reason.

• Establish direction first on a higher timeframe. Gaps are context-dependent and mean little in isolation.
• Mark unfilled gaps in the direction of that trend, and ignore gaps against it.
• Treat the gap as an area to look for entries, with confirmation from price behaviour inside it.
• Place the stop beyond the far edge of the gap, or beyond the structural low or high that the gap sits above.
• Use unfilled gaps in the opposite direction as potential targets — areas price may travel to.

Worked example

A strong rally leaves a gap between the high of the candle two bars back and the low of the current candle. Price continues higher, then pulls back several hours later into that range.

The trader is already bullish from the higher timeframe. They watch the reaction inside the gap, enter on a confirmation candle in the upper half, and place the stop below the gap's lower edge. The nearest unfilled gap above becomes the first target, and position size is calculated from the stop distance rather than chosen in advance.

Common mistakes

• Marking every gap on every timeframe. Low-timeframe charts are full of them and most are noise.
• Expecting a complete fill. Reactions often begin in the first third of the range.
• Trading gaps against the dominant trend because they are 'due' to fill. Unfilled gaps can stay unfilled for months.
• Ignoring the reason the gap formed. Gaps created by scheduled news often behave differently from gaps created by ordinary momentum.
• Using the gap as the entry trigger rather than the entry area.

Put it into practice

Frequently asked questions

What is the difference between a fair value gap and an order block?

An order block marks the candle where an impulsive move began. A fair value gap marks the unfilled range created during the move itself. They often sit next to each other, and many traders use them together — the block for the level, the gap for the pullback destination.

Do fair value gaps always get filled?

No. Filling is a tendency, not a guarantee, and strong trends routinely leave gaps behind permanently. Treat an unfilled gap as a possible destination, never as a scheduled event.

What timeframe is best for fair value gaps?

Higher timeframes produce fewer, more meaningful gaps. Many traders identify them on the 1-hour or 4-hour and execute on the 5- or 15-minute.

Is a fair value gap the same as a price gap?

No. A price gap is a discontinuity between a session close and the next open. A fair value gap happens within continuous trading, caused by speed rather than a break in the session.

Related terms