Fair Value Gap: A Three-Candle Convention

Use an explicit chart rule

One common bullish convention checks whether the third candle's low is above the first candle's high, leaving a zone between those two prices around a strong middle candle. A bearish convention reverses the comparison. LuxAlgo documents its fair-value-gap terminology; this is a primary description of an indicator convention, not independent evidence of profitable prediction.

Some implementations require a minimum gap, a directional middle candle or a volatility filter. Others use body boundaries or higher-timeframe observations. State the variant before comparing examples. The same phrase does not guarantee identical detection rules across scripts.

An original bullish example

Assume three completed candles have the following relevant extremes: candle one high 100; candle two ranges from 99 to 106; candle three low 103. Under the stated wick-based convention, the highlighted zone runs from 100 to 103 because the first and third candles do not overlap there.

The middle candle's high-low range spans that zone, but its OHLC summary does not reveal which intervening prices actually traded. The pattern therefore establishes neither an absence of transactions between 100 and 103 nor continuous trading through every price there. It also does not identify quantity at each price or participants' remaining positions.

If a later candle falls to 102, it enters the zone without traversing it completely. If it reaches 100, it covers the full illustrated interval. A script may call the first event a mitigation, while another waits for a midpoint or full traversal. LuxAlgo explicitly exposes alternative mitigation methods. Define that event before reporting how often gaps were filled.

Fair value is a label, not a valuation

This chart convention does not calculate discounted cash flows, an exchange settlement value or a consensus estimate of an asset's intrinsic worth. It cannot establish that institutions have unfilled orders in the highlighted zone. Claims about those orders require data the three-candle pattern does not contain.

A zone can remain untouched, be crossed without reversal, or be affected by a price gap that provides no usable entry. A visually precise rectangle does not identify a valid stop, a guaranteed fill or a favorable expected payoff.

Test detection and outcome separately

Record every eligible completed three-candle sequence, the detection time, zone boundaries, minimum-size rule and expiration horizon. Keep untouched zones and failures. A percentage of zones eventually revisited is uninterpretable without a defined horizon and does not equal the success rate of a trading strategy.

Compare order-block conventions and what OHLC can actually establish. Use an unseen sample before turning a chosen interpretation into a rule. The defensible statement is that specified candles meet a declared pattern condition; future price behavior remains uncertain.