The Fair Value Gap (FVG) is a valuable tool used by price action traders to identify market inefficiencies or imbalances. These imbalances occur when there is significant buying or selling pressure, leading to a substantial upward or downward movement that creates a gap in the market.
The concept behind FVGs is that the market tends to revisit these inefficiencies before continuing in the same direction as the initial impulsive move. Recognizing and understanding FVGs can give traders an advantage in the market, allowing them to use these imbalances as potential entry or exit points.
To form an FVG, three candles must exhibit strong buying or selling activity in the same direction. This results in a gap between the first candle's wick and the last candle's wick, as depicted in the accompanying figures below.