Imbalances and fair value gaps: the magnets price returns to
A healthy market trades at every price on the way up or down. When a move is violent, it skips prices, leaving a one-sided space called an imbalance or fair value gap. Markets tend to return and rebalance those gaps before continuing, which turns them into some of the most reliable magnets and entries in the method. This module shows how to find them and how to use them with the tools you already know.
What a fair value gap is
A fair value gap (FVG) is read across three candles. In an up move, it is the space between the high of the first candle and the low of the third, left open because the middle candle expanded so fast that those prices never traded on both sides. That untouched space is an imbalance. The market treats it as unfinished business and usually returns to trade through it before carrying on.
Bullish and bearish gaps
The same reading works in reverse. A bearish FVG forms in a down move: the gap sits between the low of the first candle and the high of the third. Bullish gaps tend to act as support when price drops back into them; bearish gaps tend to act as resistance when price rallies back. Direction of the gap tells you which way to lean when price returns to it.
Why price fills the gap
An imbalance is inefficiency, and markets are efficiency-seeking. Price frequently returns to rebalance the gap, trading through the empty space to fill the orders that were skipped, and then resumes its original direction. This is why a gap is both a target (price is drawn to it) and an entry (price reacts from it). Not every gap fills immediately, but an unfilled gap sitting above or below is a standing clue to where price wants to go.
Consequent encroachment
You do not have to wait for the whole gap to fill. The consequent encroachment (CE) is the 50% midpoint of the gap, and it is the level many traders use as the decision point. A reaction from CE lets you enter earlier with a tighter stop than waiting for a full fill, while still giving the gap room to do its work. Mark the top, base and midpoint of every gap you trade.
Liquidity voids
A liquidity void is a larger, more dramatic imbalance: a single big-bodied candle, or a run of them, that leaves a wide one-sided space. Voids stand out on the chart and tend to get revisited because so little trading happened inside them. Treat a void the way you treat a gap, but expect a bigger reaction, since the imbalance and the displacement behind it are both larger.
Inversion fair value gaps
Gaps are not permanent. When price closes through a gap instead of respecting it, that gap inverts: a bullish gap that fails becomes resistance, and a bearish gap that fails becomes support. An inversion FVG is a useful second chance, because the failure itself is information. If a gap you expected to hold gives way on a body close, flip your bias and watch for price to retest it from the other side.
Gaps plus order blocks
Gaps are strongest in company. A valid order block almost always leaves a fair value gap in the displacement that follows it, so the highest-probability zone is where an order block and an FVG overlap. That overlap gives you two reasons for price to react in the same small area, which lets you tighten the entry and trust it more. Confluence, not any single tool, is what makes a setup.
Entering from a gap
The entry mirrors the order block trade. Wait for price to return to the gap, enter at the CE or the far edge, place the stop just beyond the gap, and target the next liquidity. Keep it honest: a gap that only offers a tiny target after costs is not worth taking. Open the live XAUUSD chart, find the last fast move, and mark the three-candle gap it left behind.
FAQ
How do I identify a fair value gap?
Read three candles. In an up move the gap is the open space between the first candle's high and the third candle's low; in a down move it is between the first candle's low and the third candle's high. It appears when the middle candle expands so fast those prices never trade on both sides.
Does every fair value gap get filled?
No, but many do, and an unfilled gap is a standing clue to where price is drawn. Treat a gap as both a target and a potential entry, and do not assume an instant fill; sometimes price returns much later.
What is consequent encroachment?
The 50% midpoint of a fair value gap. It is the level many traders use as the decision point for an entry, because reacting from the midpoint allows a tighter stop than waiting for the gap to fill completely.
What is an inversion fair value gap?
A gap that price closed through instead of respecting, which flips its role. A bullish gap that fails becomes resistance and a bearish gap that fails becomes support, and the failure itself is a signal to flip your bias.
How do fair value gaps work with order blocks?
A valid order block leaves a gap in the displacement that follows it, so the two often overlap. That overlap is the strongest zone because price has two reasons to react in the same small area, allowing a tighter, more reliable entry.