Fair value gap

What it means

Take three bars in a row. If the first bar's high sits below the third bar's low, there is a band between them that neither of those two bars touched: the middle bar covered the whole distance in one move. That band is the gap.

The name comes from a reading of what it implies — that the move happened too quickly for the two sides to transact across the range, leaving business unfinished. This publication computes the band and not the implication: what is measurable in bars is where price did not trade, which is a fact, while why it did not is not.

The mirror image applies downward, where the first bar's low sits above the third bar's high.

How we detect it

The engine scans the last sixty bars for the three-bar pattern in either direction, and requires two things beyond the geometry. The middle bar must have CLOSED in the direction of the gap — an outside bar between two trending ones can produce the same shape while describing the chart backwards. And the band must be at least a quarter of one Average True Range wide, because narrower ones occur constantly in quiet markets and carry nothing.

Fill is measured from the bar after the pattern completes, never from the third bar itself: that bar's extreme IS the edge, so counting it would report every gap as partly filled the moment it formed. The fraction of the band price has since traded back through is carried on the read.

A band price has fully crossed is dropped. The two nearest to the current price are kept, nearest first, and a gap price is sitting inside counts as zero distance — so an open band the market is currently in always leads.

When the read carries information

• The instrument trades continuously enough for a three-bar step to mean something. On a market with a nightly break, the first bars of a session routinely produce this shape for a reason that has nothing to do with the idea.
• The frame is one the reader asked about. Gaps are frame-specific: a 15-minute band is invisible on the daily chart, and the daily band is invisible inside the 15-minute one.
• Volatility is ordinary. The ATR floor adapts, but a single volatility shock produces bands that dwarf everything around them.

When it misleads

• Around a scheduled release, a band opens on almost every instrument at once. It is a description of the release, not of any one market.
• The word GAP is also used for the distance between one session's close and the next session's open, which is a different thing entirely and one this detection has no opinion about.
• A partly filled band and an untouched one are treated as the same object here, distinguished only by the fraction. Whether that distinction matters is a judgement this publication does not make for the reader.

How it reaches you

Our answers say that a band was left untraded and whether price has been back through part of it. That is an observation about bars already printed. It is never a suggestion that price will return, and nothing on our surfaces treats an open band as a destination.

The reading is approximated from price bars alone; no order-flow or trade-level data is used or inferred.