Lecture 8: Imbalance And Fair Value Gaps – What They Indicate And How To Use Them In SMC

Introduction

In Smart Money Concepts (SMC), price movement is not always smooth. There are times when the market moves aggressively in one direction, leaving behind gaps in price action. These gaps, known as Fair Value Gaps (FVG) or Imbalances, provide key insights into where institutional traders have aggressively bought or sold an asset.

For SMC traders, understanding these gaps is crucial because they act as magnets for the price to revisit before continuing in the intended direction. In this lecture, we’ll break down what imbalances and fair value gaps are, why they matter, and how to trade them effectively.

What is an Imbalance in the Market?

An imbalance occurs when there is a strong price move in one direction without sufficient opposing orders to fill liquidity at every price level. This creates inefficiencies, meaning the market has moved too quickly, and the price may return to fill the gap before continuing in its original direction.

Imbalances are typically created by institutional traders who place large orders, causing rapid price movements. These areas become significant because price often returns to them, allowing Smart Money to fill unexecuted orders before resuming the trend.

What is a Fair Value Gap (FVG)?

A Fair Value Gap (FVG) is a three-candle pattern where the middle candle has a large body, leaving a visible gap between the first and third candle’s wicks.

How to Identify a Fair Value Gap:

1. Look for a strong, impulsive move in one direction.
2. The second candle (impulse candle) must have a large body with little to no wicks.
3. There should be a gap between the first and third candles, meaning the third candle does not fully overlap the first candle’s wick.

Example of a Fair Value Gap:

📌 Bullish FVG: When the price moves up aggressively, leaving an unfilled gap in price action.

📌 Bearish FVG: When the price drops aggressively, leaving an unfilled gap in price action.

These gaps act as zones where price is likely to return before resuming the original direction.

Why Do Fair Value Gaps Matter?

1. Indicate Institutional Activity – Large players enter the market aggressively, leaving gaps behind.
2. Act as Support & Resistance – Once price returns to an FVG, it often reacts by continuing in the previous direction.
3. Help Identify Strong Market Moves – FVGs appear in trending markets, making them useful for confirming momentum.
4. Improve Trade Entries – Price often revisits FVGs before continuing, allowing for better entry opportunities.

How to Use Fair Value Gaps in Trading

1. Trading the FVG Fill Strategy

Since Smart Money often returns to fill FVGs, traders can use this to their advantage by entering trades when price revisits an FVG before continuing in the original direction.

Steps to Trade FVG Fills:

• Identify a strong bullish or bearish move that creates an FVG.
• Wait for the price to retrace into the gap before looking for confirmation.
• Look for rejection wicks, candlestick patterns, or a change in structure before entering.

Example:

If the price moves up aggressively and leaves a bullish FVG, wait for a retracement into the FVG before looking for buying opportunities.

If the price drops aggressively and leaves a bearish FVG, wait for a pullback into the FVG before looking for selling opportunities.

2. Combining FVGs with Order Blocks

Fair Value Gaps become even stronger when they align with order blocks.

Why?

Order blocks are areas where Smart Money has placed orders.

If an order block and FVG overlap, it increases the probability that the price will react from that level.

• Bullish Confluence: Look for a bullish order block inside a bullish FVG.
• Bearish Confluence: Look for a bearish order block inside a bearish FVG.

When price revisits this area, traders can use additional confirmation signals to enter trades with confidence.

3. Using FVGs for Take Profit Levels

When the price moves into an FVG, it often bounces off key levels inside the gap. Traders can use these areas to set take profit targets.

📌 If selling from resistance, look for an unfilled FVG below as a target.

📌 If buying from support, look for an unfilled FVG above as a target.

Example of Trading a Fair Value Gap

Bullish FVG (Buy Setup)

1. Identify a strong bullish move with a large impulse candle.
2. Look for a Fair Value Gap between the first and third candles.
3. Wait for the price to retrace into the FVG.
4. Look for confirmation (bullish engulfing candle, rejection wick, or break of structure).
5. Enter a buy trade with a stop loss below the FVG and target the next resistance level.

Bearish FVG (Sell Setup)

1. Identify a strong bearish move with a large impulse candle.
2. Mark the Fair Value Gap where the price has left an unfilled gap.
3. Wait for the price to retrace into the FVG.
4. Look for confirmation (bearish engulfing candle, rejection wick, or break of structure).
5. Enter a sell trade with a stop loss above the FVG and target the next support level.

Best Practices for Trading Fair Value Gaps

✔ Trade FVGs in Line with Market Structure – If the trend is bullish, focus on bullish FVGs. If the trend is bearish, focus on bearish FVGs.

✔ Use Multi-Timeframe Analysis – Higher timeframe FVGs are more reliable than lower timeframe ones.

✔ Wait for Confirmation Before Entering – Never trade FVGs blindly. Look for rejection, candlestick patterns, or break of structure before entering.

✔ Combine with Other SMC Concepts – Order blocks, liquidity zones, and market structure can strengthen FVG setups.

Common Mistakes to Avoid

• Trading Every FVG You See – Not all gaps are worth trading. Focus on FVGs in key zones.
• Ignoring Market Context – If the price is in a strong trend, some FVGs may not get filled immediately.
• Entering Too Early – Always wait for confirmation instead of jumping into trades immediately.
• Using Small Timeframes Only – FVGs on higher timeframes (4H, Daily) hold more weight than those on M1 or M5 charts.

Final Thoughts

Fair Value Gaps are one of the most powerful tools in Smart Money trading. They represent areas where institutions have placed large orders, creating inefficiencies that price often returns to fill. By understanding how to identify and trade these gaps correctly, traders can improve their entries, exits, and overall trading accuracy.

Key Takeaways:

FVGs are price gaps created by strong institutional moves.

Price often returns to fill FVGs before continuing in the original direction.

Combining FVGs with order blocks increases the probability of successful trades.

Confirmation is key – wait for rejections or structure breaks before entering.

What’s Next?

In Lecture 9, we will cover Liquidity and Stop Hunts in SMC, explaining how institutions manipulate price to trap retail traders before moving the market in their desired direction.