Fair Value Gaps (FVG) are one of the most powerful concepts used in Smart Money trading. They reveal where price moved too quickly, leaving an **imbalance** between buyers and sellers—a zone the market often returns to rebalance orders before continuing its original direction.
Understanding and utilizing FVGs can dramatically increase your entry accuracy and help you avoid chasing price, which is a common retail trap.
What Is a Fair Value Gap (FVG)?
An FVG, often called a **price imbalance**, occurs when a strong displacement move creates a "gap" in price action between three consecutive candles (Candle 1, Candle 2, and Candle 3).
This gap represents an area where trading did not occur fairly because one side (buyers or sellers) dominated completely. Smart Money Concepts treat these FVGs as **magnets** where price is highly likely to retrace to rebalance or "mitigate" unfilled orders.
How to Identify and Mark an FVG
Bullish FVG: The Imbalance (Buy Setup)
The gap is measured from **Candle 1's wick high/low** to **Candle 3's wick low/high**. In a Bullish FVG, the gap exists between the high of C1 and the low of C3.
Why FVGs Form (Institutional Order Flow)
FVGs are not random. They appear when institutional traders create massive **displacement moves** to capture liquidity, break structure, or initiate new trends.
During this aggressive movement, the market may skip price levels, leaving imbalances behind. These gaps serve as **future reaction points** where Smart Money will likely return to fill their remaining orders (mitigate the gap).
How to Trade FVGs (Precision Entry)
The FVG should primarily be used as a **precision re-entry zone** after the market has established a clear bias, often following a *Break of Structure (BOS)* or *Change of Character (CHOCH)*.
The High-Probability FVG Setup
- **Structure Confirmation:** Identify the major trend (H4/H1).
- **Liquidity Sweep:** Market sweeps a previous low/high (liquidity grab).
- **Displacement:** A strong move (impulse leg) forms a valid FVG.
- **Entry Wait:** Wait for the retracement to enter the FVG zone.
- **Execution:** Enter with **Lower Timeframe (M5/M1)** confirmation inside the FVG.
For accurate risk management on these high-precision trades, always define your position size using the Lot Size Calculator before entry.
FVG Mitigation and Precision Entry
Best Timeframes for FVG Trading
FVG trading is highly effective when utilizing **Multi-Timeframe Analysis**:
- **Higher TFs (H1 / H4):** Identify the major *Bias* and the primary FVG zone that aligns with the overall trend.
- **Mid TFs (M15):** Mid-level confirmation and refinement of the entry zone.
- **Lower TFs (M1–M5):** Used purely for precision confirmation (e.g., a *CHOCH*) inside the H4 FVG zone.
A strong setup is always confirmed by checking the overall sentiment. For Forex traders, this means consulting the Forex Strength Meter before executing a trade.
Common FVG Trading Mistakes
Avoid these common errors to protect your capital and maintain consistency:
- **Ignoring Structure:** Entering an FVG without a clear *Break of Structure (BOS)* or *CHOCH*.
- **Blind Entry:** Assuming every gap is valid and entering without waiting for a candle confirmation on the lower timeframe.
- **Ranging Markets:** Forcing FVG setups inside consolidated or sideways markets.
- **Wrong SL Placement:** Putting your Stop Loss inside the FVG instead of safely below/above the protective structural high/low.
Pro Tips to Improve FVG Accuracy
- Always pair FVG setups with a confirmed **liquidity sweep**.
- Look for FVG confluence with **Order Blocks** or key Pivot Points.
- Avoid trading during high-impact news spikes (check your Realtime Market Dashboard).
- Never enter a position before calculating risk using the Risk & Reward Calculator.
Conclusion
Fair Value Gaps give traders a window into institutional order flow. They show where the market is unbalanced and where price is likely to retrace before continuing its trend. Mastering FVGs can give you sniper-like entries and significantly reduce losses caused by chasing price.
Continue reading: Liquidity Grabs Explained (Smart Money Guide)
