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 before continuing its original direction.
Understanding FVGs can dramatically increase your entry accuracy and help you avoid common retail traps.
What Is a Fair Value Gap (FVG)?
An FVG occurs when a strong move creates a “gap” in price action between three consecutive candles — Candle 1, Candle 2, and Candle 3. This gap represents an area where price did not trade fairly because one side (buyers or sellers) dominated completely.
Smart Money Concepts treat FVGs as magnets where price often retraces to rebalance orders.
How to Identify an FVG
Bullish FVG
- Candle 1 high is below Candle 3 low
- Strong bullish displacement
- Gap forms between C1 high → C3 low
Bearish FVG
- Candle 1 low is above Candle 3 high
- Strong bearish displacement
- Gap forms between C1 low → C3 high
Mark this zone — it becomes a high-probability retracement area.
Why FVGs Form
FVGs are not random. They appear when institutional traders create massive displacement moves to capture liquidity, break structure, or initiate new trends.
During this displacement, the market may skip price levels, leaving imbalances behind — these gaps are future reaction points.
How Smart Money Uses FVGs
Institutions use FVGs for three key purposes:
- 1. Retracement entry zones after liquidity grabs
- 2. Trend continuation points
- 3. Stop-hunt traps for retail traders
A clean FVG shows where large unfilled orders still exist.
How to Trade FVGs (Step-by-Step)
Buy Setup Using FVG
- Market sweeps previous low (liquidity grab)
- Strong bullish displacement forms FVG
- Wait for retracement into FVG
- Enter on confirmation (M5 or M1)
Sell Setup Using FVG
- Market sweeps previous high
- Bearish displacement creates FVG
- Wait for retest
- Enter on bearish confirmation
Best Timeframes for FVG Trading
- H1 / H4 — Identify major imbalances
- M15 — Mid-level confirmation
- M1–M5 — Precision entries
Combining HTF FVG with LTF confirmation is one of the strongest setups in SMC.
Common Mistakes Traders Make
- Entering FVG without BOS/CHOCH
- Assuming every gap is valid
- Ignoring overall structure
- Forcing trades inside ranging markets
- Putting stop loss inside the FVG (wrong place)
Pro Tips to Improve FVG Accuracy
- Always pair FVG with liquidity sweep
- Use FVG only after displacement
- Look for confluence with order blocks
- Avoid trading during high-impact news spikes
Conclusion
Fair Value Gaps give traders a window into institutional behavior. 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 reduce random losses caused by chasing price.
Continue reading: Liquidity Grabs Explained (Full Guide)