Displacement and fair value gaps
A fair value gap is a three-candle price imbalance left behind by a fast, one-sided move called displacement.
Interpretive framework. Smart Money Concepts is a discretionary way of labelling price action. Definitions vary among practitioners, and nothing here proves institutional orders or a guaranteed edge. All examples use synthetic numbers.
Displacement
Displacement is an unusually large, directional move — for example, one or more candles whose bodies exceed 1.5-2× the average candle range of the last 20 candles, closing near their extremes. It is how the framework distinguishes an energetic move from ordinary drift.
The three-candle FVG rule
Bullish FVG: in candles 1-2-3, candle 3's low is above candle 1's high. The gap between candle 1's high and candle 3's low is the FVG. Price traded through that zone only once, during candle 2.
Bearish FVG: candle 3's high is below candle 1's low.
Practitioners often watch for price to return to the gap; some focus on its midpoint ('consequent encroachment'). A gap is 'filled' or 'mitigated' when price trades back through it. Many gaps fill and keep going, so a return to an FVG is a place to look for evidence, not an automatic entry.
Worked example
Measuring an FVG (synthetic)
- Candle 1: high 47.20. Candle 2: opens 47.00, closes 50.10 (a displacement candle). Candle 3: low 48.40.
- Candle 3 low (48.40) > candle 1 high (47.20), so a bullish FVG exists from 47.20 to 48.40.
- Gap height = 1.20. Midpoint = 47.80.
- If the 20-candle average range is 1.1, candle 2's 3.1 body is about 2.8× average — qualifies as displacement under a 2× rule.
An FVG is a precise, checkable pattern — but whether price respects it is uncertain.
Common misconceptions
“Price must return to fill every gap.”
Some gaps remain open for a long time or indefinitely. 'Must fill' is a belief, not a rule of markets.
“An FVG is support.”
It is a zone where some traders expect a reaction. If price closes through it with force, that expectation was wrong.
Checkpoint