What is a Fair Value Gap? Definition, Formula, and Example
A fair value gap is a three-candle price imbalance where the wicks of the first and third candles fail to overlap, leaving an unfilled range that price often revisits.
Fair Value Gap Definition
A fair value gap (FVG) is a three-candle price imbalance where the wick of the first candle and the wick of the third candle do not overlap, leaving an untouched price range inside the second candle. It signals that price moved so aggressively in one direction that buyers and sellers never transacted across the middle of the range — the market skipped over a price zone instead of accepting it. FVGs are a core concept in Smart Money Concepts (SMC) and ICT (Inner Circle Trader) methodology, where the unfilled range is treated as a magnet that price returns to before continuing.
How a Fair Value Gap Is Identified
The pattern requires three consecutive candles. For a bullish FVG, the gap sits between the high of candle 1 and the low of candle 3, and the formula is:
Bullish FVG = [High of Candle 1, Low of Candle 3], when Low of Candle 3 > High of Candle 1
For a bearish FVG, the gap sits between the low of candle 1 and the high of candle 3:
Bearish FVG = [High of Candle 3, Low of Candle 1], when High of Candle 3 < Low of Candle 1
The middle candle (candle 2) is the displacement candle — it must be a large-bodied move that opens within the prior range and closes well beyond it. The wider the displacement and the larger the gap, the more significant the imbalance. FVGs are timeframe-agnostic: they form on 1-minute charts and weekly charts using identical logic.
Worked Example
On May 14, 2026, NVDA printed a bullish FVG on the 15-minute chart during the morning session. Candle 1 (9:45 AM ET) ranged from $948.20 to $951.10. Candle 2 (10:00 AM ET) opened at $950.80, ripped to $958.40, and closed at $957.60 on heavy volume following a positive analyst note. Candle 3 (10:15 AM ET) opened at $957.80, with a low of $955.30. The fair value gap sits between $951.10 (candle 1 high) and $955.30 (candle 3 low) — a $4.20 untouched zone. Three sessions later, NVDA pulled back to $953.40, filled the gap, and resumed the uptrend to $972 — a textbook FVG retest and continuation.
When Traders Use Fair Value Gaps
Traders use FVGs three ways: (1) entry zones — wait for price to retrace into the gap and enter in the direction of the displacement, treating the gap edge as support or resistance; (2) profit targets — when price is consolidating, an unfilled FVG above or below acts as a draw on liquidity; (3) trend confirmation — a series of unfilled bullish FVGs stacked higher indicates strong directional bias. Institutional algorithms reportedly rebalance into these inefficiencies, which is why the pattern works frequently enough to trade systematically.
Limitations and Common Misconceptions
Not every FVG gets filled — gaps formed during true breakouts (earnings, FDA approvals, M&A news) often go unfilled for months or permanently. Treating "the gap will fill" as a guarantee is the most common mistake. FVGs also lose reliability on illiquid tickers under 500K average daily volume, where wicks are noise rather than real imbalance. Finally, an FVG is a zone, not a precise level — traders who place stops one tick beyond the gap edge get wicked out constantly. Size the stop to the gap's width, not to a single price.