Fair Value Gap (FVG) Explained: Institutional Gaps, CE and Retests
A fair value gap is a three-candle pattern where the middle candle moves so fast that the first and third candles' wicks do not overlap, leaving a price range that traded in one direction only.
All glossary guides
- Bullish FVG: candle 3's low is above candle 1's high. Bearish FVG: candle 3's high is below candle 1's low.
- Not all gaps are equal. A gap left by a big-bodied, high-volume candle with strong delta is far more meaningful than a small one on quiet volume.
- The 50% level of a gap, often called consequent encroachment (CE), is a common reference for where a retest should hold.
- What happens on the first retest, and who defends the gap, tells you whether it is still valid.
Fair value gaps became popular through ICT and smart-money trading, but the idea underneath them is plain market mechanics. When one side is in a hurry, price can jump across a range of prices so quickly that the other side barely gets to trade there. That range is left "unfair": few orders were filled in it, so the market often comes back later to trade it properly.
This article explains how to spot a gap, why scoring them matters, and how the free order-flow tool grades each gap from 0 to 100 using volume, delta and the footprint of the candle that created it.
How to Identify a Fair Value Gap
Look at any three consecutive candles. For a bullish gap, the low of the third candle is higher than the high of the first. The middle candle is the big up-move, and the space between candle 1's high and candle 3's low is the gap. A bearish gap is the mirror image: the high of candle 3 is below the low of candle 1.
The gap is a zone, not a line. Its bottom and top are those two wick prices, and its midpoint is the 50% line, known in ICT language as consequent encroachment, or CE.
The Institutional Gap Score (0–100)
A chart full of tiny gaps is useless, so the tool scores every gap on how forceful its middle candle was. There are four parts, worth up to 25 points each.
Body vs ATR: a big candle body in the direction of the gap, compared with the 14-bar average true range, earns up to 25 points (full marks at 1.5× ATR). Volume: volume above the 20-bar average earns up to 25 (full marks at 3× average). Delta: net aggressive volume in the direction of the move earns up to 25 (full marks when 30% of the bar's volume is net buying for a bull gap, or net selling for a bear gap). Footprint: up to 15 points for stacked imbalances in the candle and up to 10 for how thin the trading inside the gap itself was.
Gaps scoring 60 or more are labelled institutional and are what the tool shows by default; 75 or more are labelled strong. If the footprint for an older candle was not recorded, the first three parts are scaled up to 100 so old gaps are still comparable.
| Component | Max points | Full marks when |
|---|---|---|
| Candle body vs ATR | 25 | Body ≥ 1.5× 14-bar ATR, in the gap's direction |
| Volume vs average | 25 | Volume ≥ 3× the 20-bar average |
| Delta with the move | 25 | Net aggressive volume ≥ 30% of the bar, same direction |
| Stacked imbalances | 15 | 3+ stacked imbalances in the gap candle |
| Thin trade inside the gap | 10 | Very little volume traded inside the gap range |
Gap States: Open, Tested, Held, Filled, Broken
A gap is tracked from the moment it forms. It starts as open (price has not come back). When price trades back into it, it becomes tested. If price dips in and then closes back out on the far side, the gap held: it was defended. If price trades all the way through to the other edge, the gap is filled, and if a candle closes beyond it, the gap is broken.
On the chart, unfilled gaps are drawn solid, the part that price has already traded back into fades, and the 50% line is dashed. Each gap's label also shows how much of it has been filled.
Reading the Footprint of a Gap
Every gap in the side panel comes with a plain-English footprint read. It tells you how big the displacement candle was against ATR, how its volume compared with average, and what share of its volume was net buying or selling. Then it describes the footprint: how many stacked imbalances there were, and what percentage of the bar's volume traded inside the gap. A low percentage means price ran through that range with little two-way trade, which is the textbook gap. A high one means it traded heavily there, so it is less of a true gap.
When price retests the gap, the card adds the delta traded inside the gap on that retest and says who won: buyers defended it, sellers defended it, or the other side pushed into it. A bullish gap retested with positive delta inside it is a gap whose buyers are still there.
Key takeaways
- A fair value gap is a three-candle range that traded in one direction only.
- Score gaps by displacement, volume, delta and footprint. Small, quiet gaps rarely matter.
- The 50% (CE) level is a useful reference for retests.
- The first retest and who defends it tells you if the gap is still alive.
Common mistakes
- Marking every three-candle gap on the chart, regardless of how strong the move was.
- Assuming a gap must be filled. Plenty of strong gaps are never revisited.
- Entering on the first touch without checking delta and footprint inside the gap on that retest.
Frequently asked questions
What is an institutional fair value gap?
There is no official definition. On The Tradeskill it means a gap scoring 60 or more out of 100, which requires a strong-bodied candle, above-average volume, delta in the direction of the move and, where available, stacked footprint imbalances. Those are the fingerprints of large, urgent orders.
What is consequent encroachment (CE)?
Consequent encroachment is the 50% midpoint of a fair value gap. Traders watch whether price respects it on a retest: holding above CE in a bullish gap suggests the buyers who created it are still defending.
Do fair value gaps always get filled?
No. Many gaps are partly filled and then respected, and some strong ones are never revisited at all. Treat a gap as a zone where a reaction is more likely, not a price that must be reached.
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Disclaimer: this article is educational content, not financial advice. Markets involve risk, and past behavior does not guarantee future results.
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