Fair value gap (FVG) explained, candle by candle

Why fair value gaps matter

Most of the time, price moves up and down through the same levels again and again. Buyers and sellers both get a chance to trade at almost every price. Now and then the market moves so fast that this does not happen: one large candle jumps a range of prices, and only one side of the market gets to trade there.

ICT calls that range a fair value gap. His idea is that the move was unbalanced, so the market tends to return to the gap later to trade it from the other side, before it continues. That gives a trader something concrete: a small, exact area on the chart where a reaction is more likely, instead of a vague feeling that price is “too high” or “too low”.

A gap on its own is not a trade. ICT pairs it with context: which way the higher timeframe is heading, whether an old high or low was just taken (see the liquidity sweep guide), and the time of day, usually inside a kill zone.

How to spot a fair value gap, step by step

1. Find the fast candle. Look for a candle with a large body that moved away quickly from where price was sitting. ICT calls a move like this displacement. That candle is candle 2.
2. Look at its neighbours. For a move up, compare the high of the candle before it (candle 1) with the low of the candle after it (candle 3). For a move down, compare candle 1’s low with candle 3’s high.
3. Check for overlap. If the two wicks do not overlap, the space between them is the gap. If they touch or overlap, there is no gap, however large candle 2 is.
4. Draw the box and its middle line. Draw a box from candle 1’s wick to candle 3’s wick and extend it to the right. Halfway up the box, draw the consequent encroachment line.
5. Name its direction. A gap left by an up candle is bullish; ICT calls it a BISI (buy-side imbalance, sell-side inefficiency). A gap left by a down candle is bearish, a SIBI (sell-side imbalance, buy-side inefficiency). The ICT glossary lists these terms.

Only the wicks decide whether there is a gap, not the bodies. Size alone tells you little: on NQ a gap can be a few ticks wide on a one-minute chart and dozens of points wide on an hourly one.

An NQ example, step by step

1. Candle 1 (09:55): NQ has been falling all morning. This candle dips under the 09:50 low (24,860.75) to 24,854.25 and closes higher. Its high, 24,878.25, will be the bottom of the gap.
2. Candle 2 (10:00): one fast up candle runs from 24,875.00 to 24,917.50. This is the displacement.
3. Candle 3 (10:05): its low is 24,902.75. It never trades back down to candle 1’s high, so the range from 24,878.25 to 24,902.75 is a bullish fair value gap, 24.5 points tall. Its CE is 24,890.50.
4. The return (10:20–10:25): price climbs to 24,944.00, then drifts back into the gap. The 10:25 candle wicks down to 24,891.25, a whole point above the CE, and closes back above the gap at 24,905.50. No body closed in the lower half: the gap held.
5. The continuation (from 10:30): price takes out the 24,944.00 high and climbs to 24,996.75 by 10:55.

A trader who was bullish here would look to buy inside the gap, as price traded back into it, with a stop below it. In his 2024 lessons ICT describes the conservative stop as under candle 1 (here under 24,854.25) and a tighter, riskier one under candle 2. Not every gap behaves this neatly: on many days price slices through the CE and the gap fails.

How traders use a gap

• As an entry. Buy in a bullish gap or sell in a bearish one, with the stop beyond it. ICT also watches the bodies: a wick through the gap can be fine, a body closing through it is a warning.
• As a target. A gap left open above or below price can be where price is heading. When you are in a short trade, an old bullish gap below can be the place to take profit.
• As a test of strength. If price closes straight through a gap, that gap has failed. ICT later calls it an inversion fair value gap and expects it to work from the other side.

Gaps appear on every timeframe. A common approach is to read direction from a higher timeframe and look for the entry gap on a lower one, from one to five minutes. ICT also stacks them: a small gap on the five-minute chart inside a larger gap on the hourly chart. Fair value gaps belong to his wider family of PD arrays, the price areas he ranks above or below fair value.

Where ICT’s explanations differ over the years

The idea is old in ICT’s teaching, but the way he defines and trades it has changed. It helps to know which version a lesson uses.

• 2016–2017 core content: the gap is framed broadly, as a range where only one side of the market was offered, and he expects it to show up as a liquidity void (a sudden, one-way run) on a lower timeframe. His examples there are forex charts, often the daily.
• 2022 mentorship: the strict three-candle rule (candle 1’s wick against candle 3’s wick) becomes the centre of the model, taught on Nasdaq futures, after a stop run and a break in short-term structure.
• From late 2022 and 2023: new labels arrive: BISI and SIBI for the two directions, and the inversion fair value gap. He also separates a fair value gap, where some trading did happen, from a true liquidity void, where no trading happened at all, such as the gap over a weekend (see NWOG and NDOG).
• 2024: he asks students to include the volume imbalance (a small space between two candle bodies) when drawing the gap, which moves the CE.

Some advice even contradicts itself. In a 2022 lesson he sells with a limit order at the CE of a wide gap; in a 2024 lesson he says he never uses the CE as a limit order. Neither is “the” rule. Test the version you use and write down which one it was.

Common mistakes

• Calling every big candle a fair value gap.

  A gap needs space between candle 1's wick and candle 3's wick. If the wicks overlap, there is no gap, however large the middle candle.

• Buying every bullish gap you see.

  A gap is a place, not a signal. Look for context first: the higher-timeframe direction, a recent sweep of an old high or low, and a kill zone.

• Ignoring how price closes inside the gap.

  Wicks can poke through; bodies tell the story. In a bullish gap, bodies closing under the CE or below the gap mean it is failing, so step aside.

• Treating a filled gap as finished.

  ICT keeps old gaps on the chart: their high, CE and low can matter again later. A gap that failed may even work from the other side, as an inversion gap.

• Drawing gaps on one timeframe and trading on another without noting it.

  Record the timeframe with every trade. A one-minute gap and an hourly gap are different setups with different results.

How to journal fair value gap trades in daqverse