The four-step identification process
Works on futures, equities, FX, and crypto — the pattern is pure price geometry, not instrument-specific.
Scan for rapid price moves
Look for two or three candles where price moved hard in one direction — a visible impulse, not a slow grind. These are the candidates. Slow, rotational moves rarely leave tradeable gaps.
Check the three-candle geometry
Candle 1 (pre-move), Candle 2 (the thrust), Candle 3 (post-move). For a bullish FVG, low(C3) > high(C1). For a bearish FVG, high(C3) < low(C1). The middle candle's body is almost always the largest of the three.
Mark the gap range
Draw the zone — from Candle 1's high to Candle 3's low (bullish), or Candle 1's low to Candle 3's high (bearish). That untested range is your FVG. The free Fair Value Gap indicator does this automatically; doing it by hand a few dozen times first builds pattern recognition.
Validate with context
A gap that forms at a structural level — yesterday's high, the session VWAP, a pivot — is worth more than a gap in thin-air midday. Context is the difference between a high-probability setup and a 50/50 pattern.
Five-minute ES or NQ is the training wheels. Enough gaps print per session to get reps; the timeframe is high enough to avoid pure noise. Spend a week circling gaps by hand on replay before deciding the indicator does it correctly.
The three false positives
Most spurious FVG calls fall into one of three buckets:
Chop mistaken for imbalance
A tiny gap in a sideways session isn't a fair-value gap — it's rotation. If the move behind the gap wasn't a real impulse (large relative range, volume behind it), the gap is structurally weak. Skip it.
Timeframe mismatch
A 30-second gap on a 1-minute chart is noise by the time the 5-minute bar closes. If you're trading 5-minute setups, work from 5-minute FVGs — or higher. The gap has to be meaningful on the timeframe you're actually trading.
No structural context
A clean FVG in the middle of nowhere — away from any level anyone watches — is often a wait-out. The retest happens, the gap fills halfway, and price wanders somewhere else. Gaps that confluence with other references do the work.
Conceptual takeaways
- Four steps: scan for impulse, check the geometry, mark the range, validate with context.
- A gap without structural context is a 50/50 pattern. The level matters as much as the shape.
- Practice on replay. Hand-circle fifty gaps before trusting the detection to an indicator.
Next chapter: how to actually trade a gap once it's identified — entries, stops, targets, and the single most common mistake that eats the edge.