What Is a Fair Value Gap? Rules and How to Test It
What a fair value gap is, how to mark one in three candles, why traders watch them, the common entry rules, and how to test whether the idea works for you.
A fair value gap is a three candle pattern where price moves so fast that part of the range only traded in one direction. The idea comes from the Inner Circle Trader (ICT) teaching, and you will also hear it called an imbalance. Traders watch these zones because price often comes back to them, and that gives a defined place to look for an entry.
How to mark one
Look at three candles in a row. The gap is the space the first and third candle don't cover.
- Bullish gap: the low of the third candle is above the high of the first. The zone runs from that high up to that low.
- Bearish gap: the high of the third candle is below the low of the first. The zone runs from that low down to that high.
The middle candle is usually large, with a close near its extreme. Small gaps in a quiet market mean little, so many traders set a minimum size.
Why traders watch them
The usual explanation is that a fast move leaves orders unfilled, so price returns to finish the business. That story is hard to prove, and you don't need it. What you can measure is simple: how often price returns to a gap, and what it does when it gets there.
A common way to trade them
There are many versions. A typical one looks like this:
- Decide the direction first, from a higher timeframe or a break of a recent high or low.
- Wait for a gap in that direction to form.
- Place a limit order inside the zone, often at the start of the gap or its middle.
- Put the stop beyond the candle that made the gap.
- Target the next obvious high or low, and check the reward against the risk.
Where it goes wrong
- Trading every gap. Most candles in a fast market make one. Without a filter you take them all.
- Fighting the move. Fading a strong trend at each gap is a quick way to collect small losses.
- Moving the rule after the fact. On a past chart it is easy to pick the gap that worked. That is why the date should be hidden when you practice.
How to test it
Write the rule down so that two people would mark the same gaps, then count. Our guide on how to backtest a strategy covers the method, and how many trades you need covers when to believe the result.
ChartTrainer has a Fair value gaps indicator that marks the open bullish and bearish gaps on a replayed chart, and a fair value gap retrace strategy you can run in the backtester and change in the script editor. It is our own reading of the idea, so compare it with how you define a gap. To practice by hand, open the ICT simulator, start a random day with the date hidden, and trade what you see. Practice results don't promise real results.
Questions
- What is a fair value gap in trading?
- A three candle pattern where the middle candle moves so fast that the first and third candles don't overlap. The space between their wicks is the gap, also called an imbalance.
- Do fair value gaps always get filled?
- No. Many fill, and some never do, especially in a strong trend. Count how often it happens on your market and timeframe before you rely on it.
- What timeframe is best for fair value gaps?
- There is no best one. Lower timeframes give more gaps and more false ones. Many day traders mark them on the 1 to 15 minute chart and take direction from a higher timeframe.
- Is a fair value gap the same as a normal gap?
- No. A normal gap is empty space between two candles, often overnight. A fair value gap sits inside continuous trading: the candles touch, but the first and third leave a zone the wicks don't cover.
- Is the fair value gap an ICT concept?
- The name was made popular by the Inner Circle Trader. The same pattern is also called an imbalance. Definitions differ a little between teachers, so write down the version you use.