Fair Value Gaps vs. Traditional Gaps: Key Differences and Trading Implications

"Traditional gaps occur when the session closes at one price and the next session opens at a markedly different price, leaving space on the chart. In spot Forex, the boundary is 5 p.m. New York roll-over, so weekend gaps still appear. Textbooks categorise them into breakaway, continuation, and exhaustion varieties, each offering clues about whether the prevailing trend will accelerate or stall."

"Another concept closely related to gaps is the FVG in Forex Fair Value Gaps, which represent zones where price has moved so quickly that market participants left untested levels behind, often providing potential areas for future retracements. Conventional wisdom says most gaps and FVGs "fill" sooner or later as price revisits these deserted zones, yet the timing of the fill is notoriously unpredictable."

"A Fair Value Gap forms inside a continuous session when three consecutive candles create a price imbalance. In an up-move, the middle candle's low stays above the first candle's high, leaving a pocket where no transactions occurred; the mirror applies in a down-move. Because every tick inside that zone went untraded, traders view the area as an imbalance that the market wants to repair."

Traditional gaps occur when one trading session closes at one price and the next opens at a markedly different price, creating visible blank space on the chart. In spot Forex, the 5 p.m. New York roll-over commonly produces weekend gaps. Textbooks divide gaps into breakaway, continuation, and exhaustion types, which provide clues about trend continuation or reversal. Fair Value Gaps form intraday when three consecutive candles leave an untraded pocket between bodies, indicating an imbalance. Both traditional gaps and FVGs often get revisited and can "fill," but the timing of fills is highly unpredictable, so traders treat these zones as potential retracement targets.

Read at Business Matters