Fair Value Gap (FVG)
Strategy & AnalysisA price imbalance on a chart where a candle's range does not overlap with the candle two bars prior, creating a "gap" in fair value. Traders expect price to revisit and fill these gaps, using them as entry zones.
Fair value gaps are a core concept in ICT (Inner Circle Trader) methodology, widely used by prop firm traders. An FVG forms when there is aggressive buying or selling that creates a three-candle pattern where the high of candle 1 does not overlap with the low of candle 3 (bullish FVG) or the low of candle 1 does not overlap with the high of candle 3 (bearish FVG).
The theory is that these gaps represent inefficient price delivery. Smart money (institutional traders) and algorithms tend to revisit these zones to rebalance order flow. Prop firm traders use FVGs as high-probability entry zones with defined risk -- entering when price retraces to the gap and placing stop-losses below/above the gap.
FVGs work particularly well in prop firm trading because they provide precise entry and stop-loss levels, which helps with position sizing and risk management. A narrow FVG means a tight stop, allowing larger position sizes within your risk limits.
ES 5-minute chart: Candle 1 high = 5200. Candle 2 (impulse) ranges 5200-5215. Candle 3 low = 5208. Bullish FVG exists between 5200 and 5208 (8 points). Price retraces to 5204 (middle of FVG). You enter long at 5204 with stop at 5198 (6 points below FVG low). On TopStep $100K with 1 ES contract: risk = 6 points * $50 = $300. Target: 5220 (16 points). Reward: $800. R:R = 1:2.67.
Fair Value Gap (FVG) directly affects whether you pass or fail a prop firm evaluation. Unlike trading your own account where you can recover from mistakes over time, prop firm rules create hard boundaries -- violate them once and you lose your challenge fee and have to start over. Strategy concepts like fair value gap (fvg) become especially important under prop firm constraints. The pressure of drawdown limits and profit targets changes how strategies perform compared to unconstrained retail accounts.
Practical example across firms: FTMO and TopStep handle this differently. FTMO is a 2-step firm with static drawdown and a 5% daily loss limit, starting from €155. TopStep is a 1-step firm with trailing drawdown and a 2% daily loss limit, starting from $49. These structural differences mean your approach to fair value gap (fvg) must adapt to whichever firm you choose.
Common mistake: Traders frequently abandon strategies during evaluations because of short-term drawdowns, switching to unfamiliar approaches that perform even worse under pressure. Stick with what you know, and size appropriately for the evaluation constraints.
Order Block
The last opposite-direction candle before a significant price move, believed to represent institutional accumulation or distribution. Traders use order blocks as support/resistance zones where smart money is likely to defend price.
Market Structure
The pattern of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) that defines the current directional bias. A break of structure (BOS) occurs when price violates the most recent swing point, signaling a potential trend change.
Liquidity Sweep
A price movement that briefly breaks past a key level (swing high/low, equal highs/lows) to trigger stop-losses and pending orders resting at those levels, before quickly reversing. Also called a "stop hunt" or "liquidity grab."
Risk-Reward Ratio
The relationship between the potential loss (risk) and potential gain (reward) on a trade, expressed as a ratio like 1:2 or 1:3. A 1:2 ratio means you risk $1 to potentially make $2.