Fair value gap
Family XII · Other terms
Not to be confused with price gap, market structure, inducement.
Fair value gap is a chart pattern formed when consecutive candles leave a vertical space with no overlapping trading. It is often described as an imbalance between buying and selling pressure, and some traders expect price to return to that area before continuing.
How a fair value gap forms
A fair value gap appears when the range of one candle and the range of a nearby candle do not overlap. In a rising move, the gap lies between the high of the first candle and the low of the third candle; in a falling move, it lies between the low of the first candle and the high of the third. The middle candle is typically large and directional.
The gap is not a physical void; it is simply a price band that was skipped quickly. Traders mark it as a potential support or resistance zone, but its significance depends on context, timeframe and market conditions.
Worked example
Suppose a stock trades on a daily chart with these three candles:
The gap spans from 100.00 to 103.00. If price later falls back into this zone, some traders watch for a reaction, though no outcome is guaranteed.
Interpretation and caveats
Fair value gaps are used in some price-action and smart-money concepts. They are not recognised in mainstream academic finance and have no fixed definition across platforms. The minimum size, timeframe and whether the gap must be filled vary by trader and instrument.
- On lower timeframes, gaps may be noise; on higher timeframes, they may carry more weight.
- A gap can be filled immediately or remain open for a long time.
- Treating every gap as a trade signal without additional confirmation can lead to losses.
Often confused with
- price gap
- A price gap is a discontinuity on a price chart where the opening price of one period differs from the closing price of the previous period, leaving an empty range with no trades recorded.
- market structure
- Market structure is the observable sequence of swing highs and swing lows on a price chart, classified as trending or ranging according to whether those swings extend in one direction or overlap.
- inducement
- An inducement is a benefit offered or received that is intended to influence a decision to trade, open an account, or select a particular firm, product or service.