Fair Value Gap

The rules

1. Bullish FVG: candle 1 high is below candle 3 low. Bearish FVG: candle 1 low is above candle 3 high.
2. The middle candle must be displacement: a large body that closes near its extreme.
3. Price often returns into the gap to rebalance it before continuing.
4. The 50% of the gap (consequent encroachment) is the key reference. Strong gaps hold it.
5. A body close through the far side invalidates the gap. It can flip into an inverse FVG.
6. Trade gaps in the direction of the higher-timeframe bias. Counter-trend gaps fill and fail more often.

How to mark it

1. Find a displacement candle: clearly bigger than the candles around it.
2. Mark the high of the candle before it and the low of the candle after it (reverse for bearish).
3. If the two wicks do not overlap, shade the range between them.
4. Extend the zone to the right and mark its 50% line.
5. Wait for price to return into the zone. Do not chase the move away from it.

The 1:3 trade

Entry at the top of the gap (candle 3 low) when price returns. Stop below candle 1. Target the next high. Reward is exactly three times the risk.

Before you enter

• Higher-timeframe bias agrees with the gap direction
• The gap was created by displacement, ideally after a liquidity sweep
• Price returns into the gap (a wick into it is enough)
• Stop beyond candle 1, not inside the gap
• Target is a clear liquidity level with at least 1:2

Common mistakes

• Trading every gap on the chart, including tiny ones in chop
• Entering before price comes back to the gap
• Placing the stop inside the gap where normal rebalancing hits it
• Ignoring a body close through the gap: the setup is over
• Taking gaps against the higher-timeframe trend

Key terms

• Displacement: fast, large-bodied move that shows intent
• Imbalance: price that traded in one direction only
• Rebalance: price returning to fill part or all of the gap
• Consequent encroachment: the 50% level of the gap
• Inverse FVG: a gap that price closed through; it flips role
• R:R: reward divided by risk; 1:3 means 3R for 1R risked

A fast candle leaves a gap. Wait for price to come back into it, put the stop beyond candle 1, and target the next liquidity.