Markets hate inefficiency. When price moves so aggressively that buyers and sellers can't transact at normal levels, a Fair Value Gap forms. These imbalances act as MAGNETS—price will often return to "fill the gap" before continuing. Learn to identify FVGs and trade the inevitable rebalancing.
Welcome to Lesson 53
You've mastered Order Blocks (where institutions transacted), Market Structure Shifts (when trends change), and Liquidity Sweeps (how institutions gather orders). Now you need to understand the PRICE ACTION SIGNATURE these moves leave behind: Fair Value Gaps (FVG).
The Missing Piece: You can identify an Order Block perfectly and wait for price to return to it. But WHY does price return? What PULLS it back? The answer: Fair Value Gaps—zones of price imbalance that the market MUST revisit to achieve equilibrium. FVGs are the "unfinished business" that creates magnetic pull.
The market has an "IOU" at FVG zones. Price will often return to allow sellers who missed the move to participate, allow institutions to fill remaining orders, and rebalance the order books.
This lesson teaches you to identify FVGs using the 3-candle model, understand WHY price returns (mitigation principle), enter at FVG 50% equilibrium (surgical entries), set SL beyond FVG boundaries (objective invalidation), and combine FVG + OB + MSS for triple confluence.
Lesson Chapters
1Chapter 1: Price Imbalance & Fair Value Gaps Defined⏱️ ~4 min
Before identifying FVGs on charts, you must understand what they represent fundamentally.
⚖️ Fair Value vs. Imbalance
Fair Value (Balanced):
"Both buyers and sellers actively transacting at a price level, creating balanced two-sided auction with price discovery through negotiation."
Normal Trading:
- Candle wicks overlap between consecutive candles
- Buyers and sellers met at every price level
- Orders filled through normal auction process
- No imbalance exists
When Fair Value BREAKS (FVG Forms):
- Institution executes massive order: "BUY 500 million EUR immediately!"
- No time for negotiation, price JUMPS
- Price moves: 1.0900 → 1.0920 in seconds
- Gap created: 1.0905-1.0915 (NO trading occurred here)
- FVG = zone where NO balanced trading happened
Why It Matters:
- Market has "IOU" at this zone
- Price often returns to rebalance (70-80% mitigation rate)
- This creates YOUR trading opportunity
🧲 Why FVGs Act as Magnets
Institutional Reality:
- Bank wanted to buy 2B EUR
- During explosive move, only filled 600M
- Still needs 1.4B EUR
- Left PENDING ORDERS in the gap
- When price returns = orders activate
Market Mechanics:
- Traders who missed move want to participate
- Institution has unfilled orders
- Market seeks efficiency
- Gap acts as magnetic pull
Your Edge:
- FVG = IOU from market
- Price WILL likely return (70-80% probability)
- 50% level is magnetic equilibrium
- Predictable rebalancing = trading opportunity
Professional Insight: FVGs aren't mystical—they're order book mechanics. When price moves too fast, pending orders remain unfilled in the gap. Price returns to fill those orders. You're trading documented pending order zones.
2Chapter 2: Anatomy of the 3-Candle FVG Formation⏱️ ~5 min
FVGs are identified using a simple 3-candle pattern where the middle candle creates displacement.
📈 Bullish FVG (Upward Imbalance)
The 3-Candle Pattern:
Candle 1 (Before):
- High: 1.0910
- Establishes the baseline
Candle 2 (Displacement):
- EXPLOSIVE bullish move
- Gaps away from Candle 1
Candle 3 (After):
- Low: 1.0925
- Continues upward
The Gap Check:
- Does Candle 1 HIGH (1.0910) overlap with Candle 3 LOW (1.0925)?
- NO! Gap = 15 pips (1.0910 to 1.0925)
- This zone had NO balanced trading = BULLISH FVG
Visual:
1.0940 ─── C3
1.0930 ───
1.0925 ═══ C3 Low (FVG lower boundary)
║
║ GAP (no trading here)
║
1.0910 ═══ C1 High (FVG upper boundary)
1.0900 ─── C1
Trading Implication:
- Price often returns to 1.0910-1.0925 zone
- 50% (1.0917.5) acts as support
- Potential bounce/entry zone
📉 Bearish FVG (Downward Imbalance)
The 3-Candle Pattern:
Candle 1 (Before):
- Low: 1.1000
- Establishes baseline
Candle 2 (Displacement):
- EXPLOSIVE bearish move
- Gaps away from Candle 1
Candle 3 (After):
- High: 1.0985
- Continues downward
The Gap Check:
- Does Candle 1 LOW (1.1000) overlap with Candle 3 HIGH (1.0985)?
- NO! Gap = 15 pips (1.0985 to 1.1000)
- This zone had NO balanced trading = BEARISH FVG
Visual:
1.1000 ═══ C1 Low (FVG upper boundary)
║
║ GAP (no trading here)
║
1.0985 ═══ C3 High (FVG lower boundary)
1.0975 ─── C3
Trading Implication:
- Price returns to 1.0985-1.1000 zone
- 50% (1.0992.5) acts as resistance
- Potential rejection/short entry
🎯 How to Mark FVGs on Your Chart
Step 1: Find Explosive Moves
- Look for candles with large displacement (30+ pips)
- These often create FVGs
Step 2: Apply the 3-Candle Test
- Check if Candle 1 wick extreme overlaps with Candle 3 wick extreme
- If NO overlap = FVG exists
Step 3: Mark the Gap
- Bullish FVG: From C1 High to C3 Low
- Bearish FVG: From C3 High to C1 Low
- Draw horizontal box between these levels
Step 4: Calculate 50% Equilibrium
- Bullish FVG (1.0910-1.0925): 50% = 1.0917.5
- This is your entry target
Step 5: Set Alerts
- Alert when price approaches FVG
- Wait for mitigation, don't force it
Quick Check: If you can't "see through" the middle candle to connect Candle 1 and Candle 3 wicks, you have an FVG. The gap is where price jumped without balanced trading.
3Chapter 3: The FVG as a Magnet — The Mitigation Principle⏱️ ~4 min
Understanding WHY price returns to FVGs is crucial for trading them confidently.
🔄 FVG Mitigation Defined
Mitigation = Price Returning to Fill the Gap
What Happens:
- FVG created at 1.0910-1.0925 (bullish)
- Price rallies to 1.0980
- Then pulls back (retracement)
- Enters FVG zone at 1.0920
- MITIGATION occurring
Three Mitigation Levels:
Partial Mitigation (Weakest):
- Price only touches upper/lower boundary
- Doesn't reach 50%
- = Weak rebalancing
- Lower probability defense
50% Mitigation (Standard):
- Price reaches 50% of FVG (1.0917.5)
- = Equilibrium achieved
- = 70-80% probability of bounce
- Professional target
Full Mitigation (Strongest):
- Price fills entire FVG
- Closes through the gap
- = Complete rebalancing
- Highest conviction reversal
The Rule: Target 50% mitigation for entries. Anything beyond is bonus.
📊 FVG Mitigation Probability
First Touch (Unmitigated FVG):
- Status: Never been touched since creation
- Institutional orders: Fully intact
- Probability: 70-80% bounce rate
- Action: Full 1% risk, aggressive entry
Second Touch (Partially Mitigated):
- Status: Touched once, bounced
- Some orders filled, some remain
- Probability: 55-65% bounce rate
- Action: 0.5% risk or confirmation needed
Third+ Touch (Heavily Mitigated):
- Status: Multiple touches
- Most orders filled
- Probability: 40-50% bounce rate
- Action: Skip or strong confluence required
Focus on FIRST touch FVGs for maximum probability.
⏳ FVG Lifespan & Timeframes
How Long Do FVGs Remain Valid?
HTF FVGs (Daily, H4):
- Can remain valid for weeks/months
- Stronger institutional significance
- Higher probability mitigations
LTF FVGs (M15, M5):
- Valid for hours/days
- Less institutional significance
- Lower probability
The Hierarchy:
- Daily FVG = Highest priority
- H4 FVG = High priority
- H1 FVG = Moderate priority
- M15 FVG = Low priority (use for entry refinement only)
Professional Approach:
- Mark HTF FVGs on Daily/H4
- Use LTF FVGs for entry timing
- Don't trade M15 FVGs alone
Key Insight: FVGs don't guarantee reversals—they identify zones where price is LIKELY to slow, rebalance, or reverse due to pending institutional orders. Combine with Order Blocks and Market Structure for maximum probability.
4Chapter 4: Trading the FVG — Entry, Stop Loss & Targets⏱️ ~5 min
Precise execution is what separates profitable FVG trading from guessing.
🎯 FVG Entry Strategies
Strategy 1: Limit Order at 50% (Professional)
Process:
- FVG: 1.0910-1.0925 (bullish)
- 50% = 1.0917.5
- Place limit buy at 1.0917.5
- Set-and-forget
Pros: Best price, optimal R:R, no emotion
Cons: ~70% fill rate
Strategy 2: Boundary Entry (Conservative)
- Enter at first touch of FVG boundary
- Bullish: Enter at 1.0925 (upper boundary)
- Higher fill rate (~85%)
Pros: Rarely miss
Cons: Worse entry, wider SL
Strategy 3: LTF Confirmation (Active)
- Wait for M15 MSS inside FVG
- See the defense happen
- Enter after confirmation
Pros: Highest confidence
Cons: Requires screen time, worse entry
Recommendation: Strategy 1 (50% limit) for most traders.
🛡️ FVG Stop Loss Placement
The Rule: Place SL 3-10 pips beyond FVG boundary (opposite side from entry).
Bullish FVG Example:
- FVG: 1.0910-1.0925
- Entry: 1.0917.5 (50%)
- SL: 1.0905 (5 pips below lower boundary 1.0910)
- Risk: 12.5 pips
Bearish FVG Example:
- FVG: 1.0985-1.1000
- Entry: 1.0992.5 (50%)
- SL: 1.1005 (5 pips above upper boundary 1.1000)
- Risk: 12.5 pips
Why This Works:
- FVG boundary = rebalancing zone
- Beyond this = setup invalidated
- Objective structural level
Buffer Guidelines:
- 3 pips: Daily/H4, low volatility
- 5 pips: H4/H1, normal volatility (most common)
- 10 pips: H1/M15, high volatility
📊 Complete FVG Trade Example
GBP/USD H4 Setup:
FVG Identification:
- Explosive bullish displacement
- C1 High: 1.2800
- C3 Low: 1.2825
- Bullish FVG: 1.2800-1.2825 (25 pips)
Entry Setup:
- Price rallies to 1.2880
- Pulls back toward FVG
- Limit order at 1.2812.5 (50%)
Risk Management:
- Entry: 1.2812.5
- SL: 1.2795 (5 pips below FVG)
- Risk: 17.5 pips
- Lot Size: 0.57 lots ($10k account, 1% = $100)
Targets:
- T1: 1.2880 (previous high) = 67.5 pips = 1:3.86 R:R
- T2: 1.2920 (major resistance) = 107.5 pips = 1:6.14 R:R
Result:
- Price enters FVG, fills limit order
- Bounces from 1.2812.5
- T1 hit: +$193
- T2 hit: +$214
- Total: +$407 = 4.07% return
Pro Tip: FVGs combined with Order Blocks create the highest probability setups. When a FVG overlaps with an OB, you have double confluence = 80%+ win rate potential.
5Chapter 5: FVG Confluence with Market Structure and Order Blocks⏱️ ~4 min
The most powerful FVG setups occur when multiple SMC concepts align at the same zone.
🎯 Triple Confluence: FVG + OB + MSS
The A+ Setup:
Component 1: MSS Confirmed
- Uptrend HL broken = bearish MSS
- Bias: Short
Component 2: Order Block Identified
- Final up candle before MSS = Bearish OB at 1.0895-1.0910
- Entry zone established
Component 3: FVG Overlaps OB
- Displacement created FVG at 1.0900-1.0920
- FVG overlaps with OB zone!
The Perfect Storm:
Bearish OB: 1.0895-1.0910
Bearish FVG: 1.0900-1.0920
Overlap zone: 1.0900-1.0910
Entry: 1.0905 (50% of overlap)
SL: 1.0915 (5 pips above OB high)
Risk: 10 pips
= TRIPLE CONFLUENCE
= 75-85% win rate potential
Why It's Powerful:
- MSS = trend changed
- OB = institution's pending sell orders
- FVG = price imbalance pulling price back
- Three independent reasons converge
✅ FVG Validation Checklist
Don't trade every FVG. Use this filter:
Criterion 1: Created by BOS/MSS
- Was FVG created during structural break?
- Example: FVG formed when price broke HH (BOS)
- Valid: YES ✅
Criterion 2: HTF Alignment
- Is FVG aligned with HTF trend?
- Daily uptrend + H4 bullish FVG
- Aligned: YES ✅
Criterion 3: Overlaps with OB
- Does FVG overlap Order Block?
- OB at 1.0895-1.0910, FVG at 1.0900-1.0920
- Overlap: YES ✅
Criterion 4: First Touch
- Is this first mitigation?
- Unmitigated: YES ✅
Perfect FVG (All 4):
✅ BOS/MSS displacement
✅ HTF alignment
✅ Overlaps OB
✅ First touch
= A+ FVG (75-85% win rate, full 1% risk)
Good FVG (2-3 Criteria):
✅ BOS/MSS
✅ HTF alignment
❌ No OB overlap
❌ Second touch
= B FVG (55-65% win rate, 0.5% risk)
📋 FVG + OB Confluence Examples
Scenario 1: Perfect Alignment
- Bearish OB: 1.1000-1.1015
- Bearish FVG: 1.1005-1.1020
- Overlap: 1.1005-1.1015 (10 pips)
- Entry: 1.1010, SL: 1.1020, Amazing R:R
Scenario 2: No Overlap (Separate Zones)
- Bullish OB: 1.0890-1.0905
- Bullish FVG: 1.0910-1.0925
- No overlap
- Two separate entry zones, choose OB (stronger)
Scenario 3: Partial Overlap
- Bullish OB: 1.0895-1.0910
- Bullish FVG: 1.0905-1.0920
- Overlap: 1.0905-1.0910 (5 pips tight!)
- High precision entry zone
Rule: The more overlap, the stronger the confluence.
Professional Standard: Never trade FVGs in isolation. Always combine with at least ONE other SMC concept (OB, MSS, or liquidity sweep). Single-factor setups have 50-55% win rates. Multi-factor setups have 70-85% win rates.
6Chapter 6: Summary, Quiz & Next Steps⏱️ ~5 min
Summary & Conclusion
Fair Value Gaps are zones of price imbalance that act as magnets for future price action.
Key Principles (0/15)
The Edge: FVGs aren't predictions—they're documented zones where institutions couldn't fill their entire orders during explosive moves. When price returns, those pending orders activate. You're trading order book mechanics, not hope.
Quiz
A Fair Value Gap (FVG) is created when:
When trading an FVG mitigation, the professional entry point is typically at:
The highest-probability FVG trade setup occurs when:
Why does price return to fill FVGs (the mitigation principle)?
Call to Action
🧲 Stop ignoring imbalances. Start trading the magnet.
Fair Value Gaps aren't mystical—they're order book mechanics. When institutions move price too fast, pending orders remain in the gap. Price returns to fill those orders.
Your Action Steps:
- Mark HTF FVGs on H4/Daily charts
- Apply 3-candle test (C1 wick extreme to C3 wick extreme)
- Calculate 50% equilibrium for each FVG
- Look for FVG + OB overlap (maximum confluence)
- Set limit orders at 50% level
- SL beyond FVG boundary (5-pip buffer)
- Target opposite liquidity or structural levels
For the next 30 days, only trade FVGs that overlap with Order Blocks or were created during BOS/MSS.
Call to Action
Manage a book, not a bet. Make correlation checks and risk caps part of your routine.
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Remember: Price doesn't return to FVGs by magic—it returns because institutions have pending orders there. Trade the orders, not the hope.
Identify. Validate. Wait. Execute. Repeat.
Prerequisites
Before studying this lesson, ensure you've mastered these foundational concepts:
Ready to trade price imbalances like institutions do? Master FVGs and unlock surgical entry precision.
Ready to continue?
Mark this lesson as complete to track your progress.