A fair value gap is a three-candle pattern where the middle candle moves so quickly that the wicks either side of it fail to overlap, leaving a price range that traded with almost no two-sided activity.
Take any three consecutive candles. If the high of the first does not reach the low of the third in an upward move — or the low of the first does not reach the high of the third in a downward move — the space between them is a fair value gap.
The middle candle moved far enough, fast enough, that price barely transacted in that range. Almost all of the activity happened on one side, which is why the area is also called an imbalance or inefficiency.
The gap is measured between the wicks of the first and third candles, not the bodies. If those wicks overlap at all, there is no gap.
The working assumption is that markets tend to revisit ranges that were skipped, filling in the two-sided trade that never happened. Plenty of gaps go unfilled for a long time, so this is a tendency to observe rather than a rule to rely on — but it makes the gap a reasonable place to expect a reaction on a pullback.
Practically, a fair value gap gives a pullback destination. In a trend, price often retraces into the nearest unfilled gap before continuing, which turns a vague 'wait for a pullback' into a specific area with a specific invalidation point.
A partial fill is common. Price often trades into the top third or half of a gap and turns from there, so waiting for a complete fill can mean missing the move entirely. Some traders use the midpoint of the gap as the working level for exactly this reason.
A strong rally leaves a gap between the high of the candle two bars back and the low of the current candle. Price continues higher, then pulls back several hours later into that range.
The trader is already bullish from the higher timeframe. They watch the reaction inside the gap, enter on a confirmation candle in the upper half, and place the stop below the gap's lower edge. The nearest unfilled gap above becomes the first target, and position size is calculated from the stop distance rather than chosen in advance.
An order block is the last opposing candle before an impulsive move away from a level — the area chartists mark as the origin of the imbalance, and watch for a reaction when price returns to it.
A liquidity sweep is a push beyond an obvious high or low that triggers the stop orders resting there, followed by a quick reversal back inside the prior range.
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Guides, calculators and indicator pages that use this concept.
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