What is Fair Value Gap (FVG)?
A 3-candle inefficiency where the wicks of candle 1 and candle 3 do not overlap — a price gap the algorithm tends to return and rebalance. FVGs are inefficiencies, not liquidity.
A Fair Value Gap forms when price displaces so fast that the wick of candle 1 and the wick of candle 3 in a three-candle sequence do not overlap, leaving an unfilled "gap" in between. Bullish FVG: candle 3's low sits above candle 1's high. Bearish FVG: candle 3's high sits below candle 1's low.
Because the delivery algorithm is built to be efficient, these inefficiencies tend to get rebalanced — price returns to "fill" the gap, often to its midpoint (consequent encroachment), before continuing.
Critical distinction: an FVG is NOT liquidity. Liquidity is resting orders (stops, pendings) — binary, swept once, gone. An FVG is a geometric zone that needs refilling. Traders who target FVGs as if they were liquidity pools systematically misread price objectives. Quality filter: bullish FVGs in the discount array and bearish FVGs in the premium array are the high-probability ones.