Been seeing this term thrown around in trading discussions but still not clear on the exact definition.
How do you identify one on the chart and what makes it different from regular price gaps?
These gaps show up when there’s strong momentum pushing price higher and not enough sellers to create smooth price action.
What I focus on is the volume behind the move when these gaps form. Higher volume usually means the gap has better odds of acting as support when price returns to test it.
I mark these zones on my charts and watch how price reacts when it comes back. Sometimes they get filled completely and sometimes price just touches the zone and bounces.
It’s when price jumps up quickly, creating a gap. The market usually returns to fill this gap later.
A bullish fair value gap occurs when price quickly rises, leaving an unfilled area on the chart. You can identify it when the high of one candle is below the low of the candle two periods later.
This gap indicates where no trades happened. Price tends to return to fill these gaps, offering potential entry points.
Unlike regular gaps that form at market open, fair value gaps develop during active trading hours due to strong buying or selling pressure.
Think of it as an imbalance zone where buyers stepped in hard and pushed price up so fast that it skipped over certain levels.
On your chart, look for three consecutive candles where the low of the third candle sits above the high of the first candle. That empty space in between is your bullish fair value gap.
I use these all the time for entries. Price loves to come back and fill these zones before continuing higher. Set alerts around these levels and wait for price to retrace back into the gap.
The key difference from overnight gaps is that fair value gaps form during regular session hours when liquidity gets temporarily absorbed. Much more reliable for trading setups in my experience.