FVG and liquidity: why price comes back

What this lesson covers

In the Order block lesson we saw the zone where large players leave orders. Here we add two more ideas: the fair value gap — a "hole" price moved through too fast — and liquidity — the pool of orders waiting in the market. Both answer the same question: why does price return to exactly this level, and why do some "breakdowns" reverse in an instant?

An important note: this course does not use short selling, margin or leverage. So bearish signs are not "sell signals" for us — they are signals to exit, protect profit or not buy.

Fair value gap (FVG)

Definition

A fair value gap is defined by three consecutive candles. The middle (2nd) candle is so large and fast that the wicks of candle 1 and candle 3 do not overlap:

• Bullish FVG: candle 1's high is below candle 3's low. The gap is between those two prices.
• Bearish FVG: candle 1's low is above candle 3's high.

In this zone price moved in one direction almost unopposed: there was no "fair" two-way trade between buyers and sellers. Hence the name — fair value gap.

On the chart: candle 1's high is $101 and candle 3's low is $102.80. The FVG zone is $101–102.80. Later price came back down to $101.40 and rose again.

Why it works

A strong move often happens when a large order is filled all at once. Two things follow: late buyers wait for a "cheaper" price, and the player who started the move wants to add to the position back in that zone. So when price returns to the gap, it finds demand there. This is not a law — it is a probability. Some FVGs are never filled, others are filled completely.

Types of fill and the CE

• Partial fill: price enters the zone but does not reach its far edge. This is the "healthiest" case — the zone did its job.
• Full fill: price closes the entire zone and passes through the far edge. After that the zone weakens; if a candle closes beyond it, it is no longer support.
• CE (consequent encroachment) is the exact middle of the zone, 50%. In the example above: ($101 + $102.80) ÷ 2 = $101.90. Price dropped to $101.40 — past the CE, but it did not close below $101. So: a deep partial fill.

Many traders treat the CE as a line in the sand: if price closes below the CE of a bullish FVG, the zone is considered weakened.

A bearish FVG — a warning for buyers

On this chart candle 1's low is $59.60 and candle 3's high is $57.60. The zone is $57.60–59.60 and the CE is $58.60. Price came back up from below, reached exactly $58.60 and was rejected.

We do not short, but this is still useful:

• If you hold this stock, taking partial profit or tightening the stop as price approaches a bearish FVG above makes sense.
• If you want to buy, entering right under such a zone gives a poor R:R: there is a "wall" on the way to your target.

Liquidity: where orders are waiting

Liquidity pools

In trader language, liquidity means orders waiting to be filled. They are not placed at random: people put orders at levels everyone can see. Such places are called liquidity pools: