Hello! Welcome to the next stage of your ICT journey.
In our last lesson, we concluded our study of institutional arrays by defining and identifying mitigation blocks. We saw that they represent a failure to continue a trend, and that the aggressive price move that follows often leaves a mark on the chart.
Today, we will begin our new module by focusing on the most common and powerful "mark" left by institutional price delivery: the Fair Value Gap (FVG). This concept is central to the entire ICT methodology. Our goal for this lesson is to answer a simple but crucial question: what exactly is a Fair Value Gap, and why is it defined as a price imbalance?
1. The Concept of Imbalance and Inefficiency
Before we look at the specific pattern on a chart, it's important to understand the theory. In a perfectly efficient market, for every buyer, there is a willing seller, and price moves smoothly to facilitate this exchange. However, institutional order flow can be so aggressive and one-sided that it overwhelms the opposite side of the market. This creates an inefficiency or an imbalance.
Think of it as "unfinished business" that the market algorithm will likely seek to address later.
Fair Value Gap (FVG) Explained: The Complete Guide
To start, let's read a brief introduction that frames the Fair Value Gap within the broader Smart Money Concept. This article from ePlanet Brokers explains the high-level idea of FVGs as market inefficiencies.
Please read the 'Introduction' and 'What is a Fair Value Gap (FVG)?' sections. Focus on the idea that an FVG is an 'unbalanced' price range that the market tends to revisit.
This idea of an imbalance is the cornerstone of the FVG concept. It's not just a random pattern; it's a footprint showing where price moved so rapidly in one direction that the normal, two-sided price discovery process was interrupted.
2. The Anatomy of a Fair Value Gap
Now that we have the theory, let's define the specific pattern. An ICT Fair Value Gap is always identified by a sequence of three candlesticks.
The simplest way to understand this is to see it visually.
Understanding Fair Value Gaps (FVG) - ICT Concepts
This video from TTrades provides a very clear and concise visual explanation of the three-candle pattern that defines an FVG.
Watch from 00:28 to 02:14. The presenter does an excellent job showing what constitutes a valid FVG and, just as importantly, what does not. Pay close attention to the concept of 'overlap' between the first and third candles.
As you just saw, the rule is simple and mechanical:
- A Bullish FVG is formed when the high of the first candle does not overlap with the low of the third candle.
- A Bearish FVG is formed when the low of the first candle does not overlap with the high of the third candle.
The space between the wicks of the first and third candle is the Fair Value Gap.
This image provides a clear, static diagram of the concept.
To hear this explained by the creator of these concepts, let's watch a segment from the ICT Mentorship.
ICT Mentorship Core Content - Month 04 - ICT Fair Value Gaps FVG
Here, Michael Huddleston (ICT) walks through the identification of an FVG, explaining it in terms of one-sided liquidity delivery.
Please watch from 01:07 to 05:05, and then from 05:41 to 06:24. In the first part, he breaks down a bearish FVG candle by candle, explaining which parts of the range have seen two-sided liquidity and which have not. The second, shorter clip provides a great summary using his 'paint brush' analogy.
ICT's explanation highlights the core idea: within the FVG, price was delivered in only one direction (e.g., selling pressure only), creating the imbalance that the market may later return to fill.
3. FVG, Imbalance, Sibi, and Bisi
You may hear the terms "Fair Value Gap" and "Imbalance" used interchangeably, and for the most part, that's fine. To be precise, an FVG is a specific type of price imbalance.
Fair Value Gap (FVG) Explained: The Complete Guide
This short FAQ from the ePlanet Brokers article clarifies the relationship between the two terms.
Read the FAQ question 'Is FVG an imbalance?'. This directly confirms the relationship between the concepts.
To make the link between FVGs and imbalances even more explicit, ICT traders often use specific acronyms:
- Bisi (Buy-side Imbalance, Sell-side Inefficiency): This is a bullish FVG. It signifies that there was a strong buy-side move, but not enough sell-side liquidity was offered to create an efficient market.
- Sibi (Sell-side Imbalance, Buy-side Inefficiency): This is a bearish FVG. It signifies a strong sell-side move where buy-side liquidity was insufficient.
Let's watch a quick video that defines these terms.
Understanding Fair Value Gaps (FVG) - ICT Concepts
This clip from the TTrades video we watched earlier introduces and explains 'Sibi' and 'Bisi'.
Watch from 02:48 to 03:52. The presenter clearly connects the FVG patterns to these acronyms, reinforcing the concept of one-sided inefficiency.
Using these terms helps you think about FVGs not just as a pattern, but as what they truly represent: a temporary breakdown in the two-way auction process of the market.
4. The Market's Tendency to Restore Balance
So, we have an imbalance. Why does it matter? It matters because the market, by its nature, seeks efficiency. These gaps act like vacuums that price is often drawn back to in order to "rebalance" or "reprice" the inefficient area.
This tendency to fill the gap is what makes FVGs such powerful tools for analysis, which we will explore in subsequent lessons.
To conclude, let's read about the underlying mechanics and psychology that give FVGs their significance.
Please read the section 'Theory Behind Fair Value Gaps (FVGs)'. It does an excellent job of summarizing why these imbalances form and why the market tends to revisit them. This connects the technical pattern to institutional behavior.
Understanding this behavior—that institutions create the inefficiency and then may use the return to that inefficiency to enter new positions—is key to trading like an informed participant rather than a reactive one.
Conclusion
Excellent work. You have now established a solid foundational understanding of one of ICT's most important concepts.
Key Takeaways:
- A Fair Value Gap (FVG) is a price imbalance caused by a rapid, one-sided move that leaves an inefficiency in the market.
- It is technically defined by a three-candle pattern where the wicks of the first and third candles do not overlap.
- The space left between the wicks is the FVG, representing where price was not delivered efficiently on both the buy and sell side.
- A bullish FVG is also called a Bisi (Buy-side Imbalance, Sell-side Inefficiency), and a bearish FVG is called a Sibi (Sell-side Imbalance, Buy-side Inefficiency).
- The market has a natural tendency to revisit these gaps to rebalance price, which makes them significant areas to monitor.
Preview of the Next Lesson:
Now that you can define what an FVG is and understand the theory behind it, the next logical step is to train your eyes to see them everywhere. In our next lesson, we will focus entirely on the practical skill of "Identify bullish and bearish FVGs on a chart." We will look at multiple examples across different timeframes to build your recognition skills.