If you have ever watched price shoot up like a rocket and then come back to the exact same spot to give you an entry, you have already seen a Fair Value Gap in action. You just didn't know its name.
Most beginners think price moves in a straight line. It doesn't. Price moves like a person running in a hurry. He runs fast, leaves his shoes behind, then comes back to pick them up. That "coming back" is the whole game of SMC.
Let me explain it in the simplest way possible.
What is Fair Value Gap, Really?
Imagine you are at a market. Normally, one shop sells apples for 100 rupees, the next shop for 101, the next for 102. There is a smooth flow.
Suddenly, big news comes. Everyone rushes to buy apples. Price jumps from 100 straight to 110. No one sold at 101, 102, 103... 109. That empty space between 100 and 110 is a Fair Value Gap.
In trading, the same thing happens with candles.
When big institutions enter with huge orders, price moves so fast that it leaves a gap between one candle's high/low and the next candle's high/low. That gap is the imbalance. The market hates imbalance. It always wants to come back and "fill" that empty space, to check if there are still buyers or sellers left there.
In technical terms, an FVG is formed by 3 candles.
Candle 1, Candle 2, and Candle 3. If Candle 2 is a big, strong impulse candle, and there is a space between Candle 1 and Candle 3 that price never touched, that space is the FVG.
That's it. No complicated indicator needed. Just 3 candles and one imbalance.
Traders use this zone for entry because when price returns to that gap, institutions often defend it. They left orders there. It's like they left a mark on the chart saying, "We bought from here, we will buy again from here."
Why Does Price Come Back to FVG?
This is the question every new trader asks me. "If price went up so strongly, why would it come down again?"
Because the move was too fast. It was unfair.
Think about it. When price moves too fast, many traders couldn't enter. The big players also couldn't fill all their orders. So price comes back, gives them a second chance, collects more liquidity, and then goes again.
That's why we don't chase. We wait. We wait for price to come back to the gap, show a little rejection, and then we enter. Patience pays. That's the whole philosophy behind FVG trading.
If you chase the breakout, you become liquidity. If you wait for the FVG, you trade with the institutions.
How Many Types of Fair Value Gap Are There?
This is where most YouTube videos confuse people. They say there are 100 types. Actually, there are only 2 main types. Everything else is just a variation of what price does AFTER the gap is formed.
Let's break them down one by one.
1. Bullish FVG = BISI
In institutional language, a Bullish FVG is called BISI - Buyside Imbalance Sellside Inefficiency.
Sounds complicated? It's not. It just means buyers were so aggressive that sellers couldn't keep up. There was inefficiency on the sell side.
You will see a big green candle in the middle. The low of Candle 3 is higher than the high of Candle 1. The space in between is your Bullish FVG / BISI.
What does it mean? Buyers are in control. The market left an imbalance below. When price comes back down into this gap, buyers are likely to step in again.
How to trade it? Don't buy at the top. Wait for price to retrace into the gap. Look for a small confirmation - a bullish engulfing, a rejection wick, a break of a small structure. Then enter with stop loss just below the gap.
I personally love Bullish FVGs after a liquidity sweep. Price takes out a low, sweeps all the retail stop losses, then shoots up and creates a Bullish FVG. That FVG is gold. Because the sweep already cleared the sellers.
2. Bearish FVG = SIBI
The opposite is called SIBI - Sellside Imbalance Buyside Inefficiency.
Here sellers were so aggressive that buyers couldn't keep up. There was inefficiency on the buy side.
Price falls aggressively. A big red candle in the middle. The high of Candle 3 is lower than the low of Candle 1. The space in between is your Bearish FVG / SIBI.
What does it mean? Sellers are in control. When price pulls back up into this gap, sellers are likely to defend it.
How to trade it? Don't sell at the bottom. Wait for price to rally back into the gap. Look for a bearish rejection. Then enter with stop loss just above the gap.
Bearish FVGs after a liquidity sweep of a high are the most powerful. Price takes the buy-side liquidity, then drops, creates a Bearish FVG. That is the classic smart money trap for retail FOMO buyers.
If you remember BISI and SIBI, you will sound professional in any SMC discussion. And more importantly, you will understand why the gap formed, not just where it formed.
These are the two main types. If you master just these two, you can trade for a lifetime.
But wait, there are 3 more types you MUST know, because they will save you from losing trades.
3. Mitigated FVG vs Unmitigated FVG
This is not a new shape. This is about the state of the gap.
If price has already come back and touched the FVG once, it's called Mitigated. The imbalance is already filled. The energy is used. Don't trade it again and again.
If price has NEVER come back to the gap, it's called Unmitigated. This is fresh. This is powerful. This is where you want to trade.
A simple rule I follow: Trade only the first time. First touch is the best touch. Second touch is weak. Third touch is a trap.
Many traders lose because they keep trading the same old FVG that price has already mitigated 3 times. Don't do that.
4. Inverse Fair Value Gap (IFVG)
This one is a little advanced, but very powerful.
Sometimes price comes back to an FVG, but instead of respecting it, it breaks straight through it. That failed FVG becomes an Inverse FVG.
Example: You had a Bullish FVG. Price comes down, but instead of bouncing, it closes below the gap. That Bullish FVG is now dead. It flips. Now it becomes a Bearish IFVG. When price comes back up to retest it, it will act as resistance.
Smart money uses IFVG to trap traders who are still buying the old gap. If you understand this flip, you will avoid a lot of false entries.
In my experience, IFVG works best on higher timeframes like H1 and H4. On M1 and M5, it gives too many fake flips.
5. Balanced Price Range (BPR)
This is the one most beginners miss, and it's the most premium concept.
Sometimes a Bullish FVG and a Bearish FVG overlap each other. Price goes up, creates a Bullish FVG, then immediately comes down and creates a Bearish FVG in the same area. The overlapping area becomes a Balanced Price Range - BPR.
Think of it as a war zone. Buyers and sellers both fought there. Price became balanced for a moment.
Why is BPR important? Because when price comes back to a BPR, it often reacts very sharply. It's a double-defended zone. Both sides have orders there.
I treat BPR as a stronger version of a normal FVG. If I see a BPR on H1, I mark it in a different colour. That's my A+ zone.
The Secret Most Traders Miss: Consequent Encroachment (C.E.) - The 50% Level
Now, here is the pro secret.
You don't always need to wait for price to fill the entire FVG.
In SMC, the middle 50% line of the FVG is called Consequent Encroachment, or C.E.
Many times, price comes back, touches only the 50% level of the gap, gives a rejection, and flies away without filling the whole gap. If you were waiting for a full fill, you missed the trade.
How do I use it? I divide my FVG into two parts. The top 50% is the premium entry, the bottom 50% is the discount. For a Bullish FVG, I watch the C.E. line very carefully. If I get a rejection wick exactly from C.E., I enter early with a smaller position. If price goes deeper to fill the full gap, I add.
This one concept alone changed my win rate. Because now I don't miss trades, and I also don't enter too late.
Pro tip: Draw your FVG box, then draw a dotted line right in the middle. That line is your C.E. Watch how many times price respects that exact line. You will be shocked.
The Final Rule: Invalidation - Wick vs Body Close
Now, one thing you must remember clearly, because this is where 90% of new traders make a mistake.
Suppose you entered a Bullish FVG. Price comes down, makes a long wick below the FVG, and then goes back up. Will you panic and exit?
No. Absolutely not.
Wick = Still Valid.
A wick means price went to that level and got rejected. Sellers tried to push price down, but they failed. Buyers took control again. This actually makes your setup stronger.
Body Close = Invalid.
But if a full candle body closes below the FVG, then the story is over.
It means buyers have lost. The gap is no longer being defended. Your Bullish FVG is no longer Bullish. It has now become an IFVG.
My simple rule:
Wick goes below FVG = Wait.
Body closes below FVG = Exit. Setup is dead.
Where should you put your Stop Loss? Not just below the FVG, not just below the C.E. Put it a little below the entire FVG range, so that one wick doesn't kick you out. And if the body closes, exit yourself, don't wait for the stop loss.
If you follow this one rule, you will never cut a good trade out of fear, and you will never stay stuck in a bad trade.
Common Mistakes Traders Make With FVG
Let me be honest with you. I also made these mistakes when I started.
Mistake 1: Trading every FVG. Not every gap is good. If the gap is too small, ignore it. If it's inside a choppy range, ignore it. Trade only the gaps that are created after a liquidity sweep or a break of structure.
Mistake 2: Entering without confirmation. Just because price entered the gap doesn't mean it will reverse. Wait for a small rejection. One candle of confirmation can save your account.
Mistake 3: Using FVG alone. FVG is not a magic strategy. Combine it with liquidity, market structure, and order block. FVG + Liquidity Sweep + Order Block = High probability setup. FVG alone = gambling.
Mistake 4: Wrong timeframe. FVG on M1 is noise. FVG on H1, H4, Daily is real institutional footprint. Always check the higher timeframe FVG first, then go to lower timeframe for entry.
Final Words
Fair Value Gap is not complicated. It's just the market's footprint.
Price moves fast, leaves a gap, comes back to fill it. That's the whole story.
But if you want to trade like a professional, remember these three words: BISI, SIBI, and C.E.
Know which side was inefficient, know where the 50% line is, and know when a gap has flipped into an IFVG or overlapped into a BPR. That's what separates a retail trader who chases from a smart money trader who waits.
If you learn to wait for that gap instead of chasing price, your trading will change completely. You will take fewer trades, but better trades. You will stop being the liquidity, and you will start trading like the institutions.
So next time you see price flying, don't run after it. Let it go. Let it create an FVG. Then wait patiently. Let it come back to you.
Because in trading, patience doesn't just pay. Patience is the payment.
