Can fair value gaps predict reversals?
Introduction If you’ve spent time staring at intraday charts, you’ve probably noticed those little voids where price seems to “skip” over a zone. In professional circles, they’re called fair value gaps (FVGs), and they’re more than curiosities on a screen. They hint at missing liquidity, a crowd chasing moves, and a potential setup for a reversal when price comes back to test the gap. I’ve seen this work in live trading rooms and in backtests alike, but like any edge, it only shines when you join it with context—timing, risk controls, and a clear plan.
What is a fair value gap? A fair value gap forms when price moves in a sharp, directional burst, leaving a clean void between candles or bars. It’s not a chart pattern in the classic sense; it’s a market microstructure signal: a zone where orders weren’t filled, where sellers or buyers briefly exhausted themselves, and where liquidity can be rekindled as price revisits the area. The core idea is simple: if the market later returns to that void, there’s a higher likelihood of a reaction as fresh orders meet the old imbalance.
Why FVGs might signal reversals The logic rests on order flow and liquidity. When price revisits a fair value gap, it tests the “fair value” reference that created the gap in the first place. If you see price stall, reject, and then consolidate or turn, that’s a sign the buyers or sellers who abandoned the gap are re-engaging. It’s not a guarantee—market regimes change, and a gap can be filled in one swing if the driver is strong. But combined with evidence of structure (a swing high/low break, a rejection candle, rising volume), FVGs can become reliable short- to mid-term reversal anchors.
Across asset classes
- Forex: intraday gaps appear as quick moves during high-impact news. If the pair returns to the gap with a bullish or bearish rejection, a fade or counter-trend trade can unfold.
- Stocks: FVGs often show up around earnings days or gap-downs/gap-ups. Re-entry into the gap plus a bullish/bearish candlestick pattern can mark a pullback or continuation reversal.
- Crypto: high volatility makes FVGs common. The test of a gap after a sharp rally or dump can deliver rapid reversals, but be mindful of liquidity dips on smaller tokens.
- Indices: index futures and ETFs can produce clean gaps around macro data; a retest often aligns with momentum cooldowns.
- Options and commodities: FVGs can be traded via structure-aware spreads or as part of a broader pullback play when the underlying tests the gap area.
- Caution: across all assets, watch for false breakouts during thin liquidity, news-driven moves, and overnight gaps that behave differently from intraday patterns.
Reliability and trade setup
- Look for confluence: a clear return to the gap, price rejection at the edge, supportive volume, and a higher time-frame trend that matches the move.
- Entry ideas: wait for a test within the gap and a failure to break back through the opposite edge, or for a short-term price rejection candle to form near the gap boundary.
- Risk controls: tight stops beyond the far edge of the gap, sizing that respects drawdown limits, and avoiding over-leveraged positions during low-liquidity periods.
- Timeframes: works on multiple scales, but the higher the timeframe, the stronger the anchoring of the signal.
DeFi, challenges, and the future Decentralized finance is expanding the toolkit for pattern-spotters but brings new risks: fragmented liquidity, oracle failures, front-running, and smart contract risk. FVG concepts translate loosely in on-chain markets where price discovery happens across multiple DEXs. The main takeaway is to treat any gap-like signal as one piece of a broader confluence, not a stand-alone predictor. The rise of smart contracts and automated liquidity provision means you’ll see more structure in price behavior, but you’ll also face new kinds of slippage and execution risk.
Future trends: smart contracts, AI-driven trading, and prop shop growth Expect more AI-assisted pattern recognition that flags FVG-like imbalances across dozens of assets, then immediately tests with rule-based orders. Prop trading desks are leaning into cross-asset programs, where a well-defined FVG setup in forex might align with a reversal signal in equities or crypto, all under strict risk budgets. The challenge is staying disciplined as automation scales; the edge lives where you keep a simple, robust framework and avoid chasing noise.
Can fair value gaps predict reversals? They can, when you read the gap as a map of liquidity and a springboard for disciplined, confluence-driven setups. The payoff isn’t a guaranteed profit, but when you combine gap-testing with price action, volume, and macro context, you gain a practical lens for navigating a crowded, fast-moving market.
Slogan: Can fair value gaps predict reversals? See the gap, test the edge, ride the turn.
