Identifying Fair Value Gaps: A Step-by-Step Guide
Mastering Institutional Price Action Patterns - Part 2 of 5
Now that you understand what Fair Value Gaps (FVGs) are and why they matter, it's time to put that knowledge into practice. Identifying FVGs on your charts is the first step to trading like an institutional player. In this article, we'll break down a clear, actionable process to spot these gaps, distinguish bullish from bearish FVGs, and avoid common pitfalls. By mastering this skill, you'll be ready to anticipate market moves with precision.
How to Identify FVGs: A 4-Step Process
Follow these steps to find FVGs on any chart, whether you're trading futures, forex, or stocks.
Step 1 Look for Rapid Price Moves
Scan your chart for areas where price jumps sharply in one direction—up or down—over a few candles. These moves often signal institutional activity overpowering the market.
Step 2 Check the Three-Candle Pattern
Focus on a three-candle sequence: Candle 1 (pre-move), Candle 2 (the gap), and Candle 3 (post-move). For a bullish FVG, the low of Candle 3 must exceed the high of Candle 1. For a bearish FVG, the high of Candle 3 must fall below the low of Candle 1.
Step 3 Confirm the Gap Zone
Highlight the price range between Candle 1's high/low and Candle 3's low/high. This untested zone is your FVG—a market inefficiency waiting to be filled.
Step 4 Validate with Context
Ensure the FVG aligns with market structure (e.g., near support/resistance or order blocks). Gaps in low-volume choppy areas are less reliable—focus on high-impact zones.
Practice this process on a 5-minute or 15-minute chart to build confidence in spotting FVGs.
Common Mistakes to Avoid
Identifying FVGs is straightforward once you know what to look for, but beginners often stumble. Here are pitfalls to watch out for:
Mistaking Noise for FVGs
Small gaps in sideways markets aren't FVGs—look for significant moves driven by volume or news.
Ignoring Timeframes
FVGs on a 1-minute chart may be irrelevant noise—use higher timeframes (e.g., 5-minute, 15-minute or hourly) for higher relevance.
Avoiding these errors keeps your analysis sharp and actionable.
Conceptual Takeaways
- FVGs form from rapid price shifts and are identified with a three-candle pattern.
- Context matters—validate FVGs with market structure and volume for reliability.
- Practice on higher timeframes to filter noise and focus on institutional moves.
Next, we'll dive into trading strategies to turn these identified FVGs into profitable opportunities.
Ready to Trade FVGs?
Continue with Part 3: Trading Fair Value Gaps.
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