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Fair Value Gap Explained by Peni2DollarzFx: 1DAnalysis, 4H Execution

Updated: Jan 30


1) What Is a Fair Value Gap?

A Fair Value Gap (FVG) is a small “vacuum” in price created when the market moves so fast that it skips trading at certain prices. That skipped area becomes an imbalance, and price often revisits it later to “rebalance” before continuing in the same direction.

Why it matters:FVGs can be high-quality entry zones because they often act like magnets for price and tend to sit near areas where liquidity was left behind—which can provide tighter stops and clear invalidation.

2) Precise Definition

Formal Definition

A Fair Value Gap (FVG) is the price range between:

  • Bullish case: the wick high of Candle 1 and the wick low of Candle 3

  • Bearish case: the wick low of Candle 1 and the wick high of Candle 3

…when these two wicks do not overlap in a three-candle sequence. This leaves an untraded slice of price created during the move through Candle 2.

Plain English (Trader Language)

Think of an FVG as a “skip” in the tape during a fast move. Big players push price so aggressively that not enough trading happens in that strip. Markets often come back to fill the imbalance, and when price returns to that zone, it commonly reacts:

  • Pullback entry in an uptrend

  • Pop-and-fade entry in a downtrend

3) How an FVG Forms (Step-by-Step)

Bullish FVG (Buy-Side Pullback Zone)

Sequence: C1 → C2 → C3 in an upswing

  1. C1 prints (can be red or green).

  2. C2 is an impulsive up candle (large body / strong displacement).

  3. C3 prints and its low is above C1’s high → meaning prices between those levels never traded.

  4. The FVG zone = from C1 high up to C3 low.

Bearish FVG (Sell-Side Pop-and-Fade Zone)

Sequence: C1 → C2 → C3 in a downswing

  1. C1 prints.

  2. C2 is an impulsive down candle (large body / strong displacement).

  3. C3 prints and its high is below C1’s low → meaning that strip stayed untraded.

  4. The FVG zone = from C3 high up to C1 low.

4) What an FVG Means (Microstructure Interpretation)

Why the Imbalance Exists

A burst of aggressive orders (often institutional) pushes price quickly through the order book, leaving thin or zero trading across a short span. That’s inefficient delivery, which markets often revisit to “repair.”

Typical Behavior Around FVGs

  • Price frequently returns to mitigate (fill) the gap.

  • On retest, an FVG often behaves like:

    • Support in a bullish FVG

    • Resistance in a bearish FVG

  • Confluence improves probability (structure, swing highs/lows, order blocks, liquidity sweeps).

A) Example: 1D Bias → 4H Execution (Bullish Continuation)

  • 1D bias: Uptrend on EUR/USD (higher highs + higher lows).

  • A strong 1D impulse creates a bullish FVG from 1.0842–1.0848.

4H Plan (Pullback Into the Gap)

When price pulls back into 1.0842–1.0848:

  • Entry: Limit at 1.0846 (mid-gap)

  • Stop: 1.0838 (below the gap + under a 4H swing)

  • Targets:

    • 1.0862 (first liquidity: prior 4H high, ~2R)

    • 1.0880 (second liquidity: last 1D swing high, ~4R)

Why this works: With the 1D trend, a fresh gap + nearby liquidity conditions often allow the FVG to act as support for continuation.

B) Example: 1D Bias → 4H Execution (Bearish Reversal From a Level)

  • 1D bias: Price hits 1D supply after sweeping a prior major high.

  • A sharp drop creates a bearish FVG at 17,905–17,925 on US100.

4H Plan (Pop Back Into the Gap)

On a pullback into 17,905–17,925:

  • Entry: Limit at 17,918 (upper third of the gap)

  • Stop: 17,936 (above the gap + above the sweep high)

  • Targets:

    • 17,882 (recent 4H low / ORL, ~2R)

    • 17,846 (deeper 1D liquidity, ~4R)

Why this works: The gap forms at 1D supply after a sweep with strong downside displacement, so the FVG often acts as resistance and can trigger a turn.

Disclaimer

This content is educational only from Peni2DollarzFx and is not financial advice.

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