Fair Value Gap Trading: Complete Strategy Guide

Fair value gaps have become one of the most popular concepts in Smart Money trading. They represent real institutional order flow imbalances that price statistically tends to revisit. But there's a massive gap between understanding FVGs and trading them profitably.

Most traders spot the basic 3-candle pattern and blindly enter when price returns to the gap. That's not a strategy. This guide breaks down how to build a complete FVG trading system with proper entries, risk management, and filtering.

What Is a Fair Value Gap?

A fair value gap forms when three consecutive candles create a price void:

1. Candle 1 establishes a range
2. Candle 2 moves aggressively (the impulse)
3. Candle 3 opens beyond the range of candle 1

The gap between candle 1's high/low and candle 3's low/high is the FVG - an area where price moved so fast that normal two-sided order flow didn't occur.

Bullish FVG: The low of candle 3 is above the high of candle 1 - unfilled demand below.

Bearish FVG: The high of candle 3 is below the low of candle 1 - unfilled supply above.

Not All FVGs Are Created Equal

This is where most traders go wrong. They treat every gap the same. In reality, there are distinct types with very different implications:

Standard FVG

The classic 3-candle pattern. A clean impulse creates an obvious gap. Most common, easiest to spot.

Trading implication: Moderate probability. Solid baseline setup when combined with structural confluence.

Inverting FVG

A standard FVG that has been completely filled and price has continued through it. The gap's original intent is negated - a bullish gap becomes a bearish zone.

Trading implication: High-probability reversal signal. One of the most powerful setups in the FVG playbook.

Engulfing FVG

The impulse candle completely engulfs the prior candle. The aggressiveness suggests strong institutional conviction.

Trading implication: Higher probability than standard FVGs. The size signals directional commitment.

Retracing FVG

Forms during a pullback within an ongoing trend - a shallow retracement before continuation.

Trading implication: Trend continuation entry. Ideal for adding to positions in the direction of the larger move.

Long-Tail FVG

One of the candles has an unusually long wick, indicating aggressive buying or selling during gap formation.

Trading implication: The wick direction provides additional context about institutional pressure.

Balancing FVG

Appears to close a previous gap in the opposite direction. Price is seeking equilibrium.

Trading implication: Suggests rebalancing rather than a new directional move. Trade with caution or skip.

The FVG Trading Strategy

Step 1: Determine Market Structure

Never trade an FVG in isolation. Before looking for gaps, know the trend:

• Bullish structure → Only trade bullish FVGs (buy on retests)
• Bearish structure → Only trade bearish FVGs (sell on retests)

This one filter eliminates a massive percentage of losing trades.

Step 2: Find FVGs on Higher Timeframes

FVGs on higher timeframes (4H, Daily) carry significantly more weight than lower timeframe gaps. A daily FVG represents institutional imbalance across an entire trading day - far more meaningful than a 5-minute micro-gap.

The multi-timeframe approach:

1. Identify FVGs on the Daily or 4H chart
2. Drop to a lower timeframe (15m, 5m) for entry timing
3. Enter when a lower timeframe confirmation occurs at the higher timeframe gap

This dramatically improves win rate.

Step 3: Wait for the Retest

Entering as an FVG forms is a momentum play. The higher-probability approach is waiting for price to return to the gap after the impulse.

A valid retest looks like:

• Price pulls back into the gap zone
• A reversal candle forms within the gap
• Volume increases as price enters the zone
• The gap is still partially unfilled

Step 4: Define Entry, Stop, and Target

Entry: When price enters the FVG zone and shows a reaction.

Stop-loss options:

• Conservative: Below the bottom of the FVG (bullish) or above the top (bearish)
• Aggressive: At the midpoint - if price passes the midpoint, the gap likely fills completely

Take-profit options:

• First target: The high of the impulse candle
• Second target: The next structural level or order block
• Extended target: The next higher-timeframe FVG in the same direction

Step 5: Manage the Trade

• Move stop to break-even at 1R profit
• Take 50% off at the first target
• Trail the remainder with a structural stop

Filters That Improve Win Rate

Size Matters

Tiny FVGs are noise. Look for gaps at least 0.5x the average candle range. Larger gaps indicate more aggressive institutional activity.

Freshness

FVGs lose relevance over time. A gap from 200 candles ago in different market conditions is less reliable than one from 20 candles ago. Focus on recent, untested gaps.

Order Block Confluence

An FVG at or near an order block has significantly higher probability. The order block provides institutional context; the FVG provides the precise entry zone.

Session Timing

FVGs during high-liquidity sessions (London open, New York open) are more reliable than those from low-volume periods. Institutional traders are most active during these windows.

Volume Confirmation

FVGs with above-average volume on the impulse candle indicate genuine institutional participation, not just a thin-market spike.

Performance Expectations

Metric	Conservative	Aggressive
Win Rate	55-65%	45-55%
Risk-Reward	1.5:1 - 2:1	2:1 - 3:1
Trades Per Week	3-5	8-12
Filters Applied	Structure + HTF + OB	Structure only

Conservative (more filters, fewer trades) gives higher win rate. Aggressive (fewer filters, more trades) catches more moves but relies on better risk-reward to compensate.

What to Look For in an FVG Indicator

Must have:

• Multiple FVG type classification (not just basic gaps)
• Mitigation tracking (partial and full fills)
• Multi-timeframe support
• Clean visualization with bullish/bearish coloring
• Built-in alerts for gap retests

Avoid:

• Indicators that draw every micro-gap
• No mitigation tracking (stale gaps everywhere)
• Single-type detection only

Common Mistakes

1. Trading every FVG - Most gaps are noise. Only trade those aligned with structure and confluence.

2. Entering before the retest - The impulse is momentum. The retest is the FVG trade. Wait for price to come back.

3. No stop-loss - "The FVG will hold" is not a plan. Define invalidation before entering.

4. Ignoring the trend - A bearish FVG in a strong uptrend will likely get filled and continued through.

5. Only looking at one timeframe - A 5-minute FVG means little alone. Higher timeframes provide context; lower timeframes provide precision.

Key Takeaways

• FVGs represent institutional order flow imbalances - not just chart patterns
• Different FVG types have different implications - learn to classify them
• Always trade FVGs in the direction of market structure
• Higher timeframe FVGs carry more weight
• The retest is the trade, not the initial impulse
• Use confluence filters (order blocks, volume, sessions) to improve win rate
• Every trade needs a defined stop-loss at the gap boundary

The traders who profit from FVGs consistently aren't finding the most gaps - they're filtering ruthlessly and only taking the highest-probability setups.