Types of Fair Value Gaps Explained

Most traders learn fair value gaps as a single concept: three candles, a void, price returns to fill it. But there are actually several distinct FVG types, each carrying different implications for how price is likely to behave.

Understanding these types transforms FVG trading from a simple pattern to a nuanced analytical framework.

Standard FVG

The classic three-candle pattern. An impulse candle creates a gap between the surrounding candles' ranges.

Characteristics:

• Clean, clear gap with an obvious impulse candle
• Most common type
• Moderate directional conviction

Trading implication: Baseline probability. Trade these when aligned with market structure and supported by additional confluence (order blocks, key levels).

Inverting FVG (Inverse FVG)

An Inverting FVG is one that has been completely filled and price continued through in the opposite direction. The gap that was originally bullish becomes a bearish zone, and vice versa.

How it forms:

1. A bullish FVG forms (gap below an impulse up-move)
2. Price returns to the gap (normal retest)
3. Instead of bouncing, price fills the gap entirely and continues lower
4. The zone flips - it's now a bearish FVG (inverse)

Trading implication: High-probability reversal signal. When a gap inverts, it means the original institutional intent was overwhelmed. The inverse gap often provides excellent entries in the new direction.

This is one of the most powerful FVG types. An inverse FVG at a liquidity sweep is arguably the highest-confluence setup in Smart Money trading.

Engulfing FVG

An Engulfing FVG is where the impulse candle completely engulfs the prior candle's entire range. The gap exists not because of a moderate move, but because of an exceptionally aggressive one.

Characteristics:

• The impulse candle's range is larger than Candle 1's entire range
• Strong, decisive directional move
• Often accompanies news events or major session opens

Trading implication: Higher probability than standard FVGs. The engulfing nature shows strong institutional conviction. These gaps tend to produce stronger reactions on retest.

Retracing FVG

A Retracing FVG forms during a pullback within an existing trend. As price retraces, the pullback itself creates a gap.

How it forms:

1. Price is in a strong uptrend
2. A pullback begins (price moves down)
3. During the pullback, a bearish FVG forms
4. The trend resumes

Trading implication: Trend continuation signal. The retracing gap marks where the pullback paused - and when price resumes the trend, this gap often gets filled as part of the continuation. These are ideal for adding to positions in the trend direction.

Caution: Don't confuse a retracing FVG with a reversal. The context (existing strong trend + shallow pullback) is what makes it a retracing gap. Understanding FVGs vs. liquidity voids also helps clarify these distinctions.

Long-Tail FVG

An FVG where one of the boundary candles (Candle 1 or Candle 3) has an unusually long wick extending into the gap area.

Characteristics:

• Long wick partially fills the gap
• The actual unfilled gap is smaller than it appears at first glance
• The wick indicates aggressive activity at the gap boundary

Trading implication: The wick already represents some order filling within the gap area. The remaining unfilled portion is the true zone of interest. These gaps sometimes produce quicker reactions because there's less gap left to fill.

How to trade: Focus on the unfilled portion of the gap (between the wick tip and the opposing candle), not the full candle range.

Balancing FVG

An FVG that appears to be closing a previous gap in the opposite direction. Price creates a new imbalance in the process of rebalancing an old one.

How it forms:

1. A bullish FVG exists (unfilled demand below)
2. Price drops to fill this bullish gap
3. During the drop, a bearish FVG forms above
4. The new bearish gap is "balancing" the old bullish gap

Trading implication: Equilibrium-seeking behavior. Price is oscillating between imbalances rather than committing to a direction. Trade with caution - these often appear in ranging or transitional markets.

Best approach: Wait for market structure to confirm a direction before trading balancing FVGs.

Consequent Encroachment

Not a separate FVG type, but a critical concept: consequent encroachment is the 50% midpoint of any FVG.

Why the midpoint matters:

• Many institutions use the 50% level as their entry within a gap
• Price reaching the midpoint has partially filled the gap
• If price pushes past the midpoint, the full fill becomes more likely
• The midpoint often acts as a decision level - reactions here are significant

How to use it:

• Conservative traders enter at the near edge of the gap
• Aggressive traders enter at the midpoint (consequent encroachment)
• If price closes beyond the midpoint, the gap's influence is significantly weakened

How to Use FVG Types in Your Trading

Prioritize High-Probability Types

Not all FVGs deserve equal attention:

1. Inverse FVGs - Highest priority (confirmed institutional shift)
2. Engulfing FVGs - High priority (strong conviction)
3. Standard FVGs - Moderate priority (needs confluence)
4. Retracing FVGs - Context-dependent (good for trend continuation)
5. Long-tail FVGs - Adjusted zones (focus on unfilled portion)
6. Balancing FVGs - Low priority (uncertain direction)

Combine Type With Context

A standard FVG at a strong order block in the direction of the trend is better than an engulfing FVG in the middle of nowhere against the structure. Type is one factor - context is everything.

Track Multiple Types

The best FVG indicators classify multiple types automatically. The Smarter Money Suite classifies multiple FVG types, letting you quickly see which gaps carry the most weight without manually analyzing each three-candle sequence.

Key Takeaways

• There are at least six distinct FVG types, each with different trading implications
• Inverse FVGs are the highest-probability type - they confirm institutional shifts
• Engulfing FVGs show strong conviction and tend to produce strong reactions
• Retracing FVGs are trend continuation signals - ideal for adding to positions
• The midpoint (consequent encroachment) of any FVG is a key decision level
• Always combine FVG type with market structure context - type alone isn't enough
• Indicators that classify multiple FVG types give you a significant analytical edge