When price moves very fast in one direction, it leaves areas where it traded only briefly, with little opposition. SMC calls these imbalances or inefficiencies. The idea is that the market tends to come back to "rebalance" them, offering trades at better prices.
The fair value gap
The most common imbalance is the fair value gap (FVG): a three-candle pattern where the middle candle moves so far that the first candle's high and the third candle's low don't overlap (for a bullish FVG). The space between them is the gap. A bearish FVG is the mirror: the first candle's low and the third candle's high don't overlap.
How traders use FVGs
- As entry zones: in an uptrend, buy when price returns into a bullish FVG, especially one that formed with a break of structure.
- As confirmation of displacement: a move that leaves an FVG is a strong move, which makes the order block behind it more credible.
- As targets: unfilled FVGs on the higher timeframe can pull price back toward them.
- The midpoint: many traders watch the 50% of the gap, which ICT calls consequent encroachment (Module 6).
Other kinds of imbalance
| Imbalance | What it looks like | Why it matters |
|---|---|---|
| Fair value gap | Gap between candle 1 and candle 3's wicks | Thin trading; price often returns |
| Volume imbalance | Gap between two candle bodies, with overlapping wicks | A smaller version of the same idea |
| Liquidity void | A run of large one-directional candles with little overlap | Price can travel back through it quickly |
| Opening gap | A gap between one session's close and the next open | Common in index futures and stocks |
Key takeaways
- Imbalances are areas price moved through quickly, with little opposition.
- A bullish fair value gap is the space between candle 1's high and candle 3's low; a bearish one is the mirror.
- Price often returns to FVGs, making them entry zones and, on higher timeframes, targets.
- Prefer FVGs that formed with displacement and a break of structure, in the right half of the range.