Trading Evolution
ICT (Inner Circle Trader) · Lesson 6 of 10

Fair Value Gap (FVG): Definition, Consequent Encroachment and Rules

A fair value gap is a three-candle pattern in which the wicks of the first and third candles do not overlap, leaving a price range that the middle candle crossed in one direction only. ICT treats it as an inefficiency that price often returns to rebalance.

Intermediate · 11 min read · Updated

What you will learn

Draw a fair value gap exactly, measure its consequent encroachment and decide whether it is worth trading.

Read first: Displacement and Market Structure Shift (MSS) in ICT

The three-candle definition

Take three consecutive candles. A bullish fair value gap exists when the high of the first candle is below the low of the third: the range between them was crossed only by the large middle candle. A bearish fair value gap is the mirror: the low of the first candle is above the high of the third.

Hypothetical example · Measuring a bullish gap

Candle 1 has a high at 101.90. Candle 2 rallies from 101.60 to 106.00. Candle 3 has a low at 103.80. The gap runs from 101.90 to 103.80, a size of 1.90 points. Its midpoint, the consequent encroachment, is 102.85.

A bullish fair value gap and its consequent encroachmentThree candles where the high of the first stays below the low of the third; the gap between them is shaded and its midpoint is dashed. Price later returns into the gap.Fair value gapCE (50%)13
The gap runs from the high of candle 1 (point 1) to the low of candle 3 (point 3); CE, consequent encroachment, is its midpoint. Hypothetical illustration drawn for this lesson — not real market data.

ICT vocabulary around gaps

  • BISI (buy-side imbalance, sell-side inefficiency): ICT’s name for a bullish FVG.
  • SIBI (sell-side imbalance, buy-side inefficiency): a bearish FVG.
  • Consequent encroachment (CE): the 50% level of the gap, watched as a reaction point.
  • Inverse FVG: a gap that price closes through; ICT then reads it from the other side, as support turned resistance or the reverse.
  • Balanced price range (BPR): the overlap of a bullish and a bearish gap.

Which gaps matter

Fast markets print many gaps, and most of them are noise. Filters that traders commonly apply:

  • the gap was created by displacement that broke structure;
  • it sits in discount for a long, in premium for a short;
  • it formed during a kill zone;
  • its size is above a minimum, for example a fraction of the average true range, so that small gaps are ignored.

Trading a return into the gap

A common plan is to wait for price to come back into the gap after the displacement, enter at the edge or at consequent encroachment, and place the stop beyond the swing that started the move. Price does not always return: strong trends leave gaps unfilled for a long time. Price can also fill the gap completely and continue, which is why the invalidation must be set before entering.

Gaps on this site’s tools

The Silver Bullet and ICT 2022 indicators detect fair value gaps with explicit size and timing rules, and draw their consequent encroachment, so you can review hundreds of examples on historical data instead of a few hand-picked ones.

A bearish gap and an inverse gap, worked through

Hypothetical example · Bearish fair value gap

Candle 1 has a low of 212.40. Candle 2 falls from 212.60 to 208.00. Candle 3 has a high of 210.10. The low of candle 1 is above the high of candle 3, so a bearish gap runs from 210.10 up to 212.40, a size of 2.30 points, with consequent encroachment at 211.25. A short plan would watch for price to rally back into 210.10–212.40, with the invalidation above the high that started the drop.

Hypothetical example · The gap becomes inverse

Two hours later price rallies and a candle closes at 213.00, above the top of the gap. The bearish gap failed. In ICT’s reading it is now an inverse fair value gap: if price comes back down to 210.10–212.40, that zone can be read as support rather than resistance. The same zone has changed role because price closed through it.

Note what stays constant in both cases: the zone is defined by wicks, its midpoint is calculated, and the invalidation is set before any entry.

Common mistakes

  • Drawing the gap from candle bodies instead of wicks.
  • Treating every gap as support or resistance, regardless of context.
  • Moving the stop inside the gap after entry: if the gap fails, the idea fails.

Practice exercise

On a 5-minute chart of the last New York session, mark every bullish and bearish fair value gap larger than 5 points on the Nasdaq-100 future (or an equivalent size on your market). Note which ones formed with displacement, which ones price came back to, and whether price respected consequent encroachment.

Check your understanding

1. When does a bullish fair value gap exist?

  1. When candle 1 high is below candle 3 low
  2. When candle 2 is bullish
  3. When candle 3 closes above candle 1
Show the answer

Answer: When candle 1 high is below candle 3 low. The non-overlap of the first and third wicks defines the gap.

2. What is consequent encroachment?

  1. The high of the gap
  2. The 50% level of the gap
  3. The close of candle 2
Show the answer

Answer: The 50% level of the gap. CE is the midpoint of the fair value gap.

3. What is an inverse fair value gap?

  1. A gap that price closes through, which is then read from the other side
  2. A gap on a weekly chart
  3. A bearish gap in an uptrend
Show the answer

Answer: A gap that price closes through, which is then read from the other side. Once price closes through a gap, ICT reads it in the opposite role.

Practise with the free tools

  • ICT 2022 Mentorship ModelFree NinjaTrader 8 indicator for the ICT 2022 Mentorship Model: liquidity sweep, MSS with displacement, Fair Value Gap entry, stop and target.
  • ICT Silver BulletFree Silver Bullet indicator for NinjaTrader 8: 03:00, 10:00 and 14:00 New York windows, liquidity sweep, MSS and FVG entry. Settings and installation guide.
  • ICT Unicorn ModelFree Unicorn indicator for NinjaTrader 8: a breaker block and a Fair Value Gap overlapping after a liquidity sweep and an MSS with displacement. Settings.

Frequently asked questions

Does price always fill a fair value gap?

No. Many gaps are filled, but strong trends can leave gaps open for a long time. Never assume a fill without an invalidation level.

Is a fair value gap the same as a price gap at the open?

No. An opening gap is a jump between two sessions. A fair value gap forms inside continuous trading, between the wicks of three candles.

Which timeframe gives the best fair value gaps?

Gaps on higher timeframes are fewer and more significant; lower-timeframe gaps are used to refine entries inside them.

Related lessons

ICT (Inner Circle Trader) · Lesson 7 of 10 · Intermediate · 10 min readOrder Blocks in ICT: Definition, Mean Threshold and ValidationMark a valid order block from its displacement and decide where to enter and where it is invalidated.Read →ICT (Inner Circle Trader) · Lesson 9 of 10 · Advanced · 11 min readOptimal Trade Entry (OTE): The 62–79% Retracement ZoneDraw the OTE zone on a displacement leg, combine it with an entry pattern and size the position from the stop.Read →

References and further reading

  1. The Inner Circle Trader — official YouTube channel — Michael J. Huddleston
  2. E-mini Nasdaq-100 futures contract specifications — CME Group

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