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Fair value gap (FVG): the zone a strong candle leaves
Posted 2026-10-30
A gap is not a guarantee
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What the video says
A fair value gap marks a zone around a strong price move. The name sounds technical, but you can learn to spot the shape by comparing candle wicks. The useful question is whether the candles meet a clear definition. The tempting mistake is to draw a rectangle and assume price owes you a return. At Backtestd, we test trading ideas on real data, and we never sell signals.
A fair value gap is a candle pattern built around a large middle candle. That middle candle shows a strong directional move, often called displacement. The candles immediately before and after it have wick ranges that do not overlap.
That separation defines the zone we call the gap. It does not mean nobody traded inside the zone. The middle candle moved through that area, and candle shapes alone cannot tell us how much trading happened there.
Some traders expect price to revisit the zone and treat it as possible support or resistance. That is an idea to test, rather than a property guaranteed by the pattern. The word fair does not establish a correct price, either.
On this chart, compare the wick ranges before and after the displacement candle. The marked zone shows their separation, without telling us what price must do next. 80 real 4-hour candles of Bitcoin, Crypto (perpetual futures), June 19, 2026 to July 2, 2026. The code found this example, not us: it is the most recent one in our data. Three candles. The middle one is a big bearish candle (a displacement): its body is 1.4 times the average candle range. Candle 3 never overlaps candle 1: between 60031 and 61029 (1.7 percent of price) no trade happened on the way down. That empty zone is the fair value gap. 1 candle later, price comes back into the gap. SMC traders wait for this retest to enter in the gap's direction. What happened next: 10 candles later, price was plus 1.8 percent from the close of the marked candle. One example proves nothing; the test at the end of this video counts thousands.
To identify a fair value gap, start with a closed candle that stands out from nearby candles. Look for a strong directional move with a large body. A dramatic wick by itself is a reason to inspect more carefully, rather than label it automatically.
For a bullish gap, compare the earlier candle's high with the later candle's low. The later low must sit above the earlier high. Mark the zone between those boundaries, because those are the edges you will track if price returns.
For a bearish gap, compare the earlier candle's low with the later candle's high. The later high must sit below the earlier low. Mark the space between them using the same logic.
Use the full wick ranges for these comparisons. Bodies that look separated can still have overlapping wicks, which removes the gap under this definition. Wait for the later candle to close, because its developing wick can still change the pattern.
A retest describes a visit, without specifying what follows. Price can turn, pause, or continue through the zone. Keep that distinction clear when reviewing a chart.
Displacement. A strong directional candle with a large body relative to nearby candles. Bullish FVG. A zone where the later candle's low sits above the earlier candle's high around an upward displacement. Bearish FVG. A zone where the later candle's high sits below the earlier candle's low around a downward displacement. Retest. A later return of price into the marked gap zone.
Look for a displacement candle, then compare the wick ranges immediately before and after it. Decide whether a gap exists and where you would mark its edges. Pause the video and find it.
Here it is. Three candles. The middle one is a big bearish candle (a displacement): its body is 1.4 times the average candle range.
What defines a bullish fair value gap? The earlier high and later low around upward displacement The edges of the middle candle's body Any empty space between candle bodies
The answer: The earlier high and later low around upward displacement. The later low must be above the earlier high, leaving separated wick ranges.
Our test reports what we measured under the stated rules and market conditions. Use those results to assess the idea, remembering that a retest alone does not establish a profitable trade. We tested 2035 versions of the rule, fees and slippage included. On crypto (perpetual futures): 772 versions, and 62 percent of them made money after fees. On stock market (indices): 506 versions, and 18 percent of them made money after fees. On commodities: 757 versions, and 28 percent of them made money after fees. Our verdict: no edge after costs.
A fair value gap requires separated wick ranges around a displacement candle. Mark the boundaries consistently before judging what happened afterward. A gap does not guarantee a return, and a return does not guarantee a reversal. A trading claim needs defined rules and measured results.
Read the lesson, step through the chart yourself, and explore the measured results at backtestd dot com. Practice identifying the shape before deciding what it might mean for a trade.
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Backtest results, not financial advice.