What it is
A fair value gap, also described as an imbalance or an inefficiency, is a three-candle structure in which the first candle's high and the third candle's low do not overlap, because the middle candle moved so quickly that a band of prices traded in only one direction. The bullish version leaves an untraded band above the first candle's high; the bearish version mirrors it below the first candle's low.
How it works
Measurement is simply the distance between the first candle's high and the third candle's low, and it is worth normalising that distance by ATR, since on a volatile instrument a small gap is indistinguishable from noise. The zone is often marked from its edge to its midpoint, because many practitioners treat a fifty percent fill as the working entry rather than waiting for a complete one.
How traders use it
The zone is used as a pullback location on the assumption that markets tend to revisit areas they skipped, which gives a defined region for entry with the stop beyond the far edge of the gap or beyond the structure that created it. It pairs naturally with order blocks and displacement, since the same impulsive move produces all three features at once.
Where it breaks down
The idea that a market must return to fill an inefficiency is a heuristic, not a mechanism. Plenty of gaps are never revisited, particularly those created by genuine repricing on news, where the old prices are simply no longer relevant. On low timeframes gaps form constantly and most are meaningless, while on high timeframes they are wide enough that the level spans a large part of the range. Like the rest of this vocabulary, it works only when the definition is precise enough to test and is paired with a real invalidation.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.