A Fair Value Gap (FVG) is a three-candle pattern where the middle candle moves so strongly that a gap exists between the first and third candle — a zone where price moved without two-way trading. The market is "imbalanced" — it moved too fast. Price tends to return to fill this gap (called rebalancing) before continuing.
What Creates a Fair Value Gap
An FVG forms when institutions place a massive order that moves price so rapidly that normal two-sided trading cannot occur. The gap represents unfilled orders on the other side — price must return to fill them.
Identifying FVGs
- Candle 1 — any candle before the impulse
- Candle 2 — the large impulse candle (body must be large, move must be fast)
- Candle 3 — first candle after the impulse
- FVG Zone = gap between Candle 1's high and Candle 3's low (bullish) OR Candle 1's low and Candle 3's high (bearish)
- The larger the gap, the stronger the FVG
Consequent Encroachment (CE)
The 50% midpoint of the FVG is called the Consequent Encroachment. If price fills only 50% of the gap and reverses, the trade is often more reliable than waiting for full fill.
Inverse Fair Value Gap (IFVG)
When price fills through an FVG completely — going past the other boundary instead of reversing — the FVG becomes an Inverse FVG and flips its role: a Bullish FVG that gets fully filled becomes bearish resistance.
FVG vs Order Block — Which Takes Priority?
| Feature | Fair Value Gap | Order Block |
|---|---|---|
| What it is | Price inefficiency / gap | Last candle before impulse |
| Why price returns | Market rebalancing unfilled orders | Institutions adding to positions |
| Entry precision | Higher — CE gives exact level | Moderate — uses candle body range |
| Best used on | Lower timeframe entries | Higher timeframe context |
| Priority | When OB and FVG overlap, take the overlap zone — highest probability |
NSE Real Use Case
NIFTY 50 at 9:25 AM: A large green candle in the first 10 minutes creates a Bullish FVG between 23,050 and 23,120. Price continues up to 23,350 by 11 AM. During the mid-day pullback (12:00–1:00 PM), NIFTY returns exactly to 23,080 (CE of the FVG at 23,085), holding precisely at the zone before continuing to 23,450 by end of day. Intraday SMC traders enter at 23,085 with stop at 23,045 — a 20-point stop for a 370-point target.