What is FVG in Trading? Strategy, Meaning & Indian Market Examples (2025)

This article covers the Fair Value Gap (FVG) trading concept, a core component of Smart Money Concepts (SMC) now widely used in Indian markets. We analyze how FVG represents price inefficiencies where institutional buying or selling has occurred aggressively, leaving a “gap” that the market often revisits. The guide explains identifying bullish and bearish FVGs on Nifty 50 and Bank Nifty charts, practical entry strategies for FY 2025-26, and risk management rules given the current 20% STCG tax regime. You will learn to distinguish high-probability gaps from random volatility using real market examples from November 2025.

What is FVG in Trading? In the fast-paced world of Indian derivatives, where Nifty 50 hovers around the 26,000 mark (as of November 2025), retail traders often wonder why price suddenly reverses from seemingly empty zones on the chart. These “empty” zones are often Fair Value Gaps (FVG). Unlike traditional gaps that appear overnight, FVGs form during live trading sessions, signaling a rush of institutional orders that the market hasn’t yet balanced. Understanding What is FVG in Trading isn’t just about learning a pattern; it’s about decoding where the “Smart Money” (FIIs and DIIs) has left its footprints.

Meaning of Fair Value Gap (FVG)

A Fair Value Gap (FVG), also known as an “imbalance” or “inefficiency,” occurs when buying or selling pressure is so intense that price skips over a specific range without trading at those levels. In a balanced market, buyers and sellers match orders at every price tick. However, during institutional activity—like a sudden 200-point rally in Bank Nifty—orders get filled so quickly that a gap is left behind.

Think of it like painting a wall. If you move your roller too fast, you leave small unpainted patches. The painter (the market) eventually has to come back to fill those patches to complete the job. Similarly, the market often returns to the FVG zone to “fill” the orders that were skipped, restoring equilibrium.

Why FVG Matters in FY 2025-26

In the current market environment, where algorithmic trading dominates NSE volumes, FVGs have become reliable magnets for price. With Nifty lot sizes at 75 units (as of November 2025), catching a precision entry at an FVG fill can significantly improve your Risk-to-Reward ratio compared to chasing breakouts.

How to Identify a Fair Value Gap?

Identifying a Fair Value Gap requires looking at a three-candle sequence. It is not a single candlestick pattern but a relationship between three consecutive candles. Here is the step-by-step process for identifying them on Indian charts:

The 3-Candle Rule

To spot an FVG, focus on the wicks of Candle 1 and Candle 3 relative to the large body of Candle 2 (the impulse candle).

Visual Example (Bullish):

1. Candle 1: A green candle closes at ₹25,900 (High of wick: ₹25,910).
2. Candle 2: A massive green candle surges to ₹26,000.
3. Candle 3: Opens and moves up, but its wick Low is ₹25,950.
4. The Gap: The area between ₹25,910 (Candle 1 High) and ₹25,950 (Candle 3 Low) is the Fair Value Gap. The market never traded between ₹25,910 and ₹25,950 during this move.

How Do Traders Use Fair Value Gaps?

Once you have identified What is FVG in Trading, the next step is execution. Traders use FVGs primarily for limit order entries and targets. Instead of buying immediately after a big spike (FOMO), FVG traders wait for the price to retrace.

1. The Entry Strategy (Retracement)

The most common strategy is to place a Limit Order at the start of the FVG.

• Bullish Setup: If Nifty leaves a Bullish FVG between 25,910 and 25,950, you place a Buy Limit at 25,950 (the top of the gap). You expect the price to dip, tag your order, and resume the uptrend.
• Bearish Setup: If a stock drops leaving a Bearish FVG, you place a Sell Limit at the bottom of the gap, expecting a bounce to fill it before the drop continues.

2. The Target Strategy (Liquidity Run)

FVGs also act as magnets. If you are already in a trade, an open FVG on the opposite side can be your target.

• Example: You bought Reliance at ₹1,400. There is an old unfilled Bearish FVG at ₹1,450. You can set your Target (Take Profit) at ₹1,450, knowing the market will likely reach there to balance the inefficiency.

3. Stop Loss Placement

A valid FVG should act as support/resistance. If the price completely smashes through the FVG and closes on the other side, the setup is invalid.

• Rule: Place your Stop Loss just below the Candle 1 High (for Bullish FVG) or above the Candle 1 Low (for Bearish FVG).

Example of Fair Value Gap in Trading

Let’s apply this to a realistic Nifty 50 scenario for November 2025.

Market Context: Nifty 50 is trending up at 26,000.
Instrument: Nifty 50 Futures (Current Lot Size: 75 units).

1. Formation: On the 15-minute chart, Nifty rallies from 25,800 to 26,000.
2. Identification: You spot a Bullish FVG between 25,850 (Candle 1 High) and 25,880 (Candle 3 Low). The gap is 30 points wide.
3. The Wait: Instead of buying at 26,000, you wait. Two hours later, Nifty corrects down to 25,880.
4. Execution: You enter a Long position at 25,880.
5. Risk Management: Stop Loss at 25,840 (40 points risk). Target at 26,000 (120 points reward).

Trade Outcome Calculation:

• Entry: ₹25,880
• Exit: ₹26,000
• Points Gained: 120 points
• Profit per Lot: 120 points × 75 units = ₹9,000 per lot.
• Tax Note: Remember, Short Term Capital Gains (STCG) are taxed at 20% for FY 2025-26. Your net profit would be post-tax and brokerage.

Note: Nifty 50 lot size is 75 as of November 2025, but NSE circulars indicate a reduction to 65 effective December 30, 2025. Always check current specifications.

Fair Value Gaps in Different Markets

The concept of What is FVG in Trading applies universally, but nuances exist across Indian segments.

1. Nifty 50 (Index Options)

• Best Timeframe: 15-minute and 1-hour charts.
• Expiry: Weekly contracts expire every Tuesday (as of Nov 2025). FVGs on Tuesday mornings often get filled rapidly due to Gamma spikes.

2. Bank Nifty

• Current Status: Weekly contracts for Bank Nifty were discontinued in November 2024. You can now only trade Monthly or Quarterly contracts.
• Lot Size: Currently 35 units* (subject to NSE revision to 30 in Dec 2025).
• Behavior: Bank Nifty FVGs are more volatile. A 100-point gap can be filled in a single 5-minute candle. Wider stop losses are recommended.

3. Stocks (Equity)

• Application: Works best on high-volume stocks like HDFC Bank, Reliance, or ICICI Bank.
• Gap Up/Downs: In stocks, daily gaps (opening price vs previous close) often act like massive FVGs. The “Gap Fill” strategy is essentially an FVG strategy on a daily timeframe.

Should You Trade Fair Value Gaps?

Is this strategy right for your portfolio? Let’s weigh the pros and cons for an Indian retail investor.

Pros

• Defined Risk: You know exactly where your setup fails (beyond the gap).
• High Reward: Catching a retracement often gives you the best possible entry price.
• Institutional Logic: You are trading with the big players, not against them.

Cons

• Patience Required: You might wait hours for a fill, only to see the market rally without you. (The “Over-shoot” risk).
• False Fills: Sometimes price pierces the gap to hunt stop losses before reversing.
• Tax Impact: Frequent scalping of small FVGs attracts 20% STCG tax and transaction charges, eating into profits.

Conclusion

Mastering What is FVG in Trading shifts your perspective from chasing green candles to patiently waiting for institutional retracements. It is a disciplined approach that aligns your entries with market efficiency. While no strategy is 100% perfect, combining FVG with trend analysis gives you a significant edge in the volatile Indian markets of 2025. Remember, the goal is not to catch every move, but to catch the high-probability ones where the “Smart Money” has shown its hand.

Ready to apply FVG strategies with professional-grade tools? Open your PL Capital account and start trading with advanced charting features today.

FAQs on FVG in Trading

1. What Does FVG Trading Mean?

FVG stands for Fair Value Gap. It refers to a trading strategy based on identifying price imbalances on a chart where buying or selling was so aggressive that it left a gap. Traders expect the price to return to this gap to “balance” the market before continuing the trend.

2. Is FVG Bullish or Bearish?

It can be both. A Bullish FVG forms when price surges up, leaving a gap between the first candle’s high and third candle’s low (Demand Zone). A Bearish FVG forms when price crashes down, leaving a gap between the first candle’s low and third candle’s high (Supply Zone).

3. How to Draw a FVG?

Identify a large impulse candle (Candle 2). Look at the candle before it (Candle 1) and the candle after it (Candle 3). Draw a rectangular box between the High of Candle 1 and the Low of Candle 3 (for bullish). If they don’t overlap, that empty space is your FVG.

4. What is the Best Timeframe for FVG?

For intraday trading in Nifty 50 or Bank Nifty, the 15-minute and 5-minute timeframes are most effective. For swing trading stocks, use the Daily or 4-Hour charts to find major institutional gaps that may take days to fill.

5. Does Every FVG Get Filled?

No, not every gap gets filled immediately. Strong “breakaway” gaps may remain open for a long time if the trend is extremely powerful. However, statistically, the market revisits most FVGs to collect liquidity, making them high-probability zones for entries.