The Fair Value Gap (FVG) Trading Strategy

A stock rips higher on three consecutive one-minute candles. Look closely at the middle one and something's missing: the wick of the candle before it tops out at $67.40, and the wick of the candle after it starts at $67.58. Nothing traded between those two prices in a normal, two-way sense during that stretch. Price simply jumped across an eighteen-cent rangeRangeA range (or trading range) is a price zone where a stock oscillates between a defined support floor and resistance ceiling without making meaningful new highs or lows — price is consolidating rather than trending, and the dominant trade is Read definition → on the way up.

That skipped range is a fair value gapGapA gap is a price discontinuity on a chart where a stock opens significantly higher or lower than the previous session's close, leaving a visible empty space — gap-ups are driven by overnight buying pressure or positive news; gap-downs by seRead definition →, and the theory behind trading it is straightforward: a range that got skipped rather than genuinely traded through, tested, and agreed upon by both sides is considered unfinished business, a zone the market is statistically more likely to revisit later than a range that was properly negotiated the first time.

What is a fair value gap? A fair value gap, often shortened to FVG and also called an imbalance, is a three-candle pattern where the high of the first candle and the low of the third candle don't overlap, leaving a price range on the middle candle that wasn't touched by the candles on either side of it. It marks a stretch of price the market moved through quickly rather than trading through in a normal, two-sided way.

It's worth being precise about terminology, since "gap" gets used for two genuinely different things in trading. An overnight or session gap happens between one day's close and the next day's open, when a stock opens at a meaningfully different price than where it last traded, often driven by news, earningsEarningsAn earnings report is the quarterly financial disclosure a public company files with the SEC, revealing revenue, earnings per share (EPS), profit margins, and forward guidance — it's the most significant regular catalyst for individual stocRead definition →, or broader market moves overnight. A fair value gap is an entirely intracandle phenomenon: it forms within a single continuous session, built from three consecutive candles on whatever timeframe a trader is watching, with no session break involved at all.

The two concepts share a loose family resemblance, both describe a price range the market "skipped," but they form for different reasons and get traded with different logic. This article covers the three-candle intracandle version specifically.

A technically valid FVG exists on nearly every fast, one-directional move, which is exactly the problem: a one-minute chart during an active session can produce dozens of them, most too small and too insignificant to be worth a trader's attention. The qualification standard that separates a tradeable FVG from routine noise requires the underlying move to meet the same bar as a valid order block: real conviction, meaning the three-candle sequence forms as part of a genuinely impulsive move with volumeVolumeVolume is the total number of shares (or contracts) traded during a given time period — it's the primary confirmation tool for all price action, because a price move accompanied by high volume indicates genuine market participation, while tRead definition → clearly above the session's recent average, not a minor, unremarkable wiggle.

Gap size relative to the instrument's normal volatility matters too. An FVG spanning a few cents on a low-priced, low-volatility stock might be statistically insignificant, essentially rounding error in the context of that stock's normal candle-to-candle movement, while the same absolute gap size on a different instrument could represent a genuinely meaningful skipped range. Measuring the gap's size against that instrument's average true rangeAverage True RangeAverage True Range (ATR) measures how much a stock or market typically moves over a set number of periods — it's a pure volatility reading, not a direction signal.Read definition →, rather than judging it in raw price terms, gives a more consistent standard across different stocks.

This setup treats a partial fill with rejection as continuation confirmation, and a full fill without rejection as invalidation, a meaningful distinction from simply assuming every FVG gets filled and reverses. In practice, gaps get partially filled and continue, fully filled and reverse, or never revisited at all; the setup is specifically built around the first outcome, not a blanket assumption that all three are equally likely or equally tradeable.

Picture a liquid stock trading around $67.10 that begins an impulsive move at 10:12 AM ET on elevated volume. The first one-minute candle in the sequence has a high of $67.40. The second candle gaps further, trading from $67.55 to $67.90. The third candle has a low of $67.58. Since the first candle's high ($67.40) doesn't overlap with the third candle's low ($67.58), an eighteen-cent fair value gap exists between $67.40 and $67.58, and the move behind it showed clearly elevated volume, meeting the qualification standard.

By 10:31 AM, price has pulled back from its high near $68.20 down toward $67.65, roughly a 35% fill of the gap, not yet enough to trigger the setup's 50% threshold. Price continues down to $67.48 at 10:34 AM, now a 76% fill. The next candle prints a clear rejection: it dips to $67.42, just inside the gap's lower half, and closes back at $67.71, reversing sharply.

That's the entry trigger: a fill past 50% followed by a rejection candle back in the original direction. A trader would enter long around $67.70 as that candle closes, with a stop at $67.35 (below the gap's far edge), and an initial target at $68.20, the high of the original impulsive move, fifty cents of reward against thirty-five cents of risk.