Fair value gaps explained

What traders mean by a fair value gap

In the version most courses teach, a fair value gap is the band between the first and third candle of a three-candle move, when those two ranges do not meet. On a rise, the high of the first candle sits below the low of the third. The gap is the distance between them. On a fall, the low of the first sits above the high of the third. The middle candle is the one that travelled. Some drawings take the wicks. Some take only the bodies. Two traders can outline different edges on the same three candles and call both a fair value gap.

The story attached to the pattern is usually the same. The move was so quick that the market did not trade the prices in between, or did not trade them fairly. Those prices are then treated as unfinished. A later return is expected to fill the gap, and the fill is expected to do something: hold as support on the way back into a rising gap, or as resistance on the way back into a falling one.

The three candles

The pattern needs nothing more than the candles. Find one that ran, then look at the candle before it and the candle after it. If the whole of the later candle sits beyond the whole of the earlier one, the space between those two ranges is the gap. The middle candle’s range covers that space. That is the pattern.

Picture an ordinary rise, each candle overlapping the one before it. Then one candle climbs through a stretch the previous candle never reached, and the candle after that trades entirely above the first candle’s high. Between that first high and the third candle’s low is a band that only the middle candle entered. That band is the area that gets marked. The falling version is the same shape turned over: a long down candle, and a third candle whose entire range sits below the first candle’s low.

This is not the same thing as a gap at the open of a session, where the market was closed and the first print is somewhere else. A fair value gap, in the way the term is used, can appear in a market that never stopped printing. The word is shared. The situation is not.

What the speed shows

A candle is a summary of a period, not a list of the trades inside it. When price travels a long way in one period, the candle is tall. The candle before it finished lower, or higher. The candle after it trades entirely beyond the first. If those two ranges do not meet, a gap appears between them, even though the tall candle joined the prices.

The gap is a relationship between two candle summaries. It appears when the move is large relative to the period of those candles. A lower timeframe can show more of what traded during the middle candle, and it may arrange those prices into a different candle structure. That detail does not, by itself, remove the pattern on the timeframe where the three candles were seen. The pattern says something about the scale you are looking at. It does not say that the prices inside it were missing from the market.

What the pattern does not mean

During the middle candle, price moved through the band. Trades can be struck all the way along that path. The candle chart will not show those trades one by one, and it will not show a hole where none occurred. A fast candle and a non-overlapping pair beside it are compatible with a market that dealt continuously through the band.

“Fair” in the name suggests that the prices in between were not a proper place to have traded. The chart does not grade the prices. It shows that one period covered them quickly, and that the periods on either side did not overlap. Thin trading, a one-sided burst, and ordinary trade that simply travelled are all possible inside the same shape. The shape does not choose among them.

What it does not store

The further story is that orders, usually institutional ones, were left unfinished in the band and are waiting for price to come back. That is the same kind of step taken with a marked candle. Order blocks explained is about what a historical area records, and what it assumes is still there. A fair value gap places the assumption in the space between candles rather than inside one of them. The space is visible because of how the three candles sit. The resting size is not. A fast leave shows that price moved. It is a poor record of someone still needing to deal at the prices they passed through.

When price comes back

Sometimes price returns into the band. The return can slow there. Candles overlap inside it and leave again in the direction of the original move. Traders call that a fill that held, and they treat the gap as support or resistance that worked.

What you can see is the return and the reaction. You cannot see an old order being completed, or see that the reaction came from the gap rather than from whatever else price was doing at the time. A return is a new event. The three candles record where a fast move passed. They do not oblige the later one.

When it does not

Sometimes price does not come back. The band stays above or below the market for the rest of the swing, the session, or longer. A run of gaps that were later visited does not make the next one due. Describing every unvisited gap as unfinished business states a hope about the future. The chart’s statement is smaller. These three candles left a band their outer ranges did not cover, and price has not traded there again yet.

What a return can show

A return into the band can fail to remain there, and leave again the way it came. It can establish itself through the band, or settle inside it and stop treating the edges as anything special. For a while it can do neither. Liquidity grabs and breakouts is about that distinction at an obvious high or low: the push is the attempt, and rejection or acceptance is what you watch afterwards. The same watching applies to a return into a gap. The pattern is not an entry. Acceptance and rejection are developing observations, and a later swing can revise them.

If the middle candle was the push through an obvious high or low, orders beyond that level may have been part of the speed. Stop-loss hunting explained is about what a stop order is, and about what the chart can show when price runs a visible level. The gap is the shape left after that candle. It does not identify the orders.

Inside the three readings

The Market Maker Method reads developing behaviour as Accumulation, Manipulation, and Distribution, also called Profit Release. The gap itself does not establish which of those the market is in.

While price is being held, a small three-candle gap can appear and then be traded back through without the market leaving. The question there is still whether price is being held: Accumulation.

A sharp push through a visible level can leave a gap and then come back through it as the push fails. Manipulation is the name for a push that does not stay beyond the level. The gap is one mark that push can leave, not evidence that it was arranged.

A move that leaves and keeps going can leave a gap behind it. Distribution, also called Profit Release, is the reading for travel that continues after price has been held, or after a test has failed. The gap does not measure how far that travel goes, and the reading does not depend on a later fill. If later price no longer fits the reading, the reading gives way.

On the chart

None of this needs an indicator. Three candles are enough to see whether a band was left between two ranges, and later candles are enough to see whether price returned and what it did there.

PAT for TradingView is one way to keep the Market Maker Method in view while that question is still open. A Pressure Point marks a meaningful change in behaviour. What matters is what price does afterwards. A Ray Line is a reference for which side is holding and which side is not. Purple Dots draw attention to a moment worth watching. How those readings sit on a candle is set out in How PAT reads the market.