Path to Profitability: Fair Value Gaps Explained

Fair Value Gaps Explained

A fair value gap (FVG) is an imbalance in price where there are insufficient buy or sell orders inside a price range.

What an FVG is

• Typically appears as a three-candle pattern:
  • An initial candle.
  • A strong, expansionary middle candle that creates the imbalance.
  • A third candle that leaves a gap between the first candle’s wick and the third candle’s wick.
• Bullish FVG: gap between the top wick of the 1st candle and the bottom wick of the 3rd candle (signals a lack of sell orders).
• Bearish FVG: gap between the bottom wick of the 1st candle and the top wick of the 3rd candle (signals a lack of buy orders).
• Candle color for the 1st and 3rd candles does not matter; the middle candle is the one that shows the swift imbalance.

Why FVGs matter

• FVGs mark price ranges where orders were not filled (an imbalance). When price returns to that range it often moves decisively in the original direction — providing continuation confluence.
• Use FVGs as one confluence among others (structure, liquidity, order flow). Do not trade FVGs in isolation.

Invalidation / “disrespect”

• An FVG is disrespected (invalidated) when a candle closes through the gap (for example, a bullish close above a bearish FVG).
• Invalidation often signals the trend could be changing or that the FVG is no longer useful.

Stacked FVGs and practical rules

• Multiple FVGs can stack; if they stack without retracement between them, they remain valid until price balances that stacked range.
• If price fills the stacked range and then pushes beyond a higher-high or lower-low, treat the entire imbalanced range as balanced and remove those FVGs — don’t keep old, irrelevant FVGs on the chart.
• A single stacked FVG can be invalidated while lower ones remain valid; always consider the larger imbalanced range and recent structure.

Common pitfalls

• Treating overlapping wicks as an FVG (overlapping wicks indicate there wasn’t an imbalance).
• Taking trades solely off a single FVG without additional confluences or confirmation (structure break, liquidity sweeps, order flow).
• Leaving already-balanced or used FVGs on the chart and trading them later incorrectly.

Practical examples covered (brief)

• Bullish FVG in an uptrend acting as a retracement area that pushes price higher.
• Bearish FVG in a downtrend reinforcing continuation after a break of structure.
• FVGs that get disrespected by a candle close through the gap (invalidating the FVG).
• Stacked bullish/bearish FVGs that are filled sequentially or removed once the imbalance is fully balanced and price continues.

Takeaway

FVGs are a structural, order-flow–based concept marking areas lacking orders and thus areas where price can move quickly when revisited. Use them as part of a broader confluence framework, monitor for invalidation (a close through the gap), and remove obsolete FVGs after the imbalance has been balanced.

Speakers

• Main presenter / host (the video’s instructor)