Fair Value Gaps and Imbalances in Trading: The Smart Money Strategy That Retail Traders Ignore. Have you ever wondered why the price suddenly reverses or "fills the gap" before continuing its movement? This is not random - it's by design. The market leaves behind imbalances and fair value gaps (FVGs) that indicate where the price is likely to return. These are not just visual oddities - they are fingerprints of institutional activity. If you are serious about mastering smart money trading strategies, this is a concept you cannot ignore. What is an imbalance in trading? In trading, an imbalance refers to very rapid price movement - where buyers or sellers push the price strongly in one direction, leaving little to no opportunity for the other side to execute orders. The result? A "gap" in price movement, often seen between: the high of one candle and the low of two or three subsequent candles, creating what is known as a fair value gap - an area where the price moved inefficiently and is likely to return to rebalance. Smart investors know this. They use fair value gaps as magnets for future price movements. What is a fair value gap (FVG)? A fair value gap is a gap in price movement caused by an imbalance in order flow. This gap indicates that the market moved too quickly, and a "fair value" has not yet been established. This often occurs during: breakouts resulting from consolidations, sudden spikes from news, strong impulsive moves from institutions. These gaps are high-probability areas for the price to return to, as smart investors often revisit them to fill uncompleted orders before continuing their movement. Why do smart investors intentionally leave imbalances? Institutions do not just want to move the price; they want to move it efficiently and profitably. When they execute large trades, they: 1. Force the price strongly in the desired direction (creating an imbalance) 2. Wait for the price to retrace to the gap where unfilled orders remain 3. Use this pullback to accumulate or distribute more trades. This is known as the mitigation step - a key part of smart money concepts and institutional trading strategy. How to identify fair value gaps and use them in your trading Here’s a simple method to spot fair value gaps: ✅ Look for three consecutive candles where the body of the middle candle moves sharply away from the previous and next candles, leaving a visible gap. ✅ Identify the area from the high of the first candle to the low of the third candle (for bullish gaps) - or the opposite for bearish gaps. ✅ Wait for the price to return to that gap, then confirm through: market structure alignment session timing (e.g., New York or London open) rejection wicks or reversal patterns Bonus: Fair value gaps align beautifully with other smart money tools such as: liquidity zones order blocks break of structure (BOS) Real-world example: FVG trap and reversal Let’s say the price breaks out of a range with a strong bullish candle. It leaves a gap between the high of the previous candle and the low of the breakout candle. Retail traders buy the breakout. But smart money? They wait. The price returns to the fair value gap, fills the unbalanced orders, and then rises with institutional support - leaving retail behind or stalled. If you are patient, you will catch the movement from the area that smart money used to re-enter. Why fair value gaps give you an edge Most traders chase the price. You don’t have to. Fair value gaps give you: ✅ Precise re-entry zones ✅ Low-risk, high-reward setups ✅ Context on where smart money activity is If you can master reading imbalances, you will stop trading based on emotion - and start trading based on logic and intent. Final thoughts: Read the gaps, trade the intent Fair value gaps are not just technical oddities - they are clues. They show where the price moved unfairly and where smart money plans to return. When FVG indicators align with liquidity zones, market structure, and timing, they pave the way for a high-probability roadmap for price movement. Start by identifying these gaps. Wait for the return. Let the market come to you.
