Understanding Fair Value Gaps (FVGs)
When institutional algorithms execute large market orders, price moves so fast that one side of the order book is skipped. This creates a three-candle price imbalance known as a Fair Value Gap (FVG). In a bullish FVG, the low of candle 3 does not overlap with the high of candle 1, leaving an inefficient price pocket.
The Mitigation Entry Rule:
Market makers frequently return price to test the unfilled FVG pocket before continuing the primary trend. Set limit orders at the 50% midpoint (Consequent Encroachment) of the gap.
How Liquidity Sweeps Trigger Institutional Entries
Retail traders place stop-losses at obvious double tops and swing highs. Institutional buyers cannot enter large positions without moving the price against themselves, so algorithms push price slightly above the swing high to trigger those retail buy stops. Once the liquidity is absorbed, price drops sharply back below the key level.
Step-by-Step FVG Execution Checklist
- Identify a strong displacement candle that breaks previous market structure on the 1-Hour chart.
- Mark the gap between Candle 1's high and Candle 3's low (Bullish FVG).
- Wait for price to retrace and tap the upper boundary or 50% midpoint of the FVG.
- Place your stop-loss 1 tick below Candle 1's low; target the next external swing high.