Fair Value Gap (FVG)
A three-candle price pattern where the wicks of the first and third candles do not overlap, leaving a price gap (imbalance) on the chart that represents an area of inefficient price delivery, often revisited by the market as it seeks to fill the imbalance.
The Fair Value Gap concept was popularised by the Inner Circle Trader (ICT) methodology developed by Michael Huddleston. In this framework, price was understood to move in a series of expansions and retracements. When price moved impulsively — often as a result of institutional order execution — it left behind price ranges that were traded through rapidly without adequate time for two-sided market participation. These rapid moves created an imbalance between buyers and sellers within that range.
The three-candle pattern was identified as follows: on the first candle, note the high; on the third candle, note the low (for a bullish FVG). If the low of the third candle was above the high of the first candle, a gap existed between them — the second candle's body spanned this gap but the wicks of candles one and three did not overlap. This non-overlapping zone was the FVG. A bearish FVG was the mirror image, where the high of the third candle was below the low of the first candle.
In Indian market application, FVGs were identified on 15-minute, 1-hour, and daily charts of Nifty 50 and Bank Nifty. The rationale for their revisit was that unfilled orders from the rapid move were theoretically resting within the gap, and as price returned to the zone, those resting orders provided a reaction point. Historically, FVGs in Nifty were observed to act as short-term support (for bullish FVGs) or resistance (for bearish FVGs) more often than not, though far from always.
The quality of an FVG was considered in proportion to the size of the impulse move that created it. A gap created during a strong trending day on high volume was given more weight than a small gap formed during low-volume overnight or pre-market activity. FVGs nested within larger-timeframe trend structures were historically more reliable as reaction zones than those formed against the broader trend.
FVG analysis was frequently combined with order block identification and liquidity sweep patterns in the SMC-based trading approach that gained widespread traction in Indian trading communities, particularly among younger retail participants exposed to international trading education content.