Inverse Fair Value Gaps in SMC: How to Trade Efficiently

Smart Money Concepts (SMC) has become one of the most respected frameworks for understanding institutional trading behaviour in financial markets. 

Among its many tools and structures, the concept of Fair Value Gaps (FVGs) plays a central role in helping traders identify imbalances and liquidity zones. But there's a lesser-known variation that offers unique trading opportunities: the Inverse Fair Value Gap.

This guide explains the significance of Inverse Fair Value Gaps, their connection to conventional SMC principles, and strategies for trading them in actual market environments.

Understanding the Core: What Is a Fair Value Gap?

In traditional SMC, a Fair Value Gap is an imbalance in price action where the market moves so quickly in one direction that it leaves behind an untraded zone. It typically occurs during news releases, institutional buying or selling, or high-momentum breakouts.

An FVG is identified on a three-candle sequence where:

• The middle candle's body has a strong move (either bullish or bearish).

• The candles before and after the move do not overlap with the middle candle's wick.

• It creates a "gap" in the price where liquidity is thin or absent.

Institutional traders often revisit these zones to "fill" the gap and collect unfilled orders, making them ideal entry points for retail traders following Smart Money footprints.

What Is an Inverse Fair Value Gap?

An Inverse Fair Value Gap (IFVG) reverses this concept by looking for liquidity traps and false breakouts rather than inefficiencies in momentum moves. 

Unlike the standard FVG, which focuses on explosive movement leaving gaps behind, the IFVG is formed when price quickly returns to a previous imbalance, only to reverse in the opposite direction.

It reflects the manipulative nature of the market when smart money draws traders into a perceived imbalance only to trap them.

Key features of an IFVG include:

• Occurs in the opposite direction of a trend continuation.

• Typically aligns with liquidity sweeps or stop hunts.

• Serves as a false fill of a fair value gap to trap breakout or retracement traders.

• Ideal for reversal setups after a price fakes a FVG fill.

In essence, the inverse fair value gap is a manipulated revisit of a traditional FVG that fools the majority into thinking the market is continuing, when in fact it is about to reverse.

Key Characteristics

 1. Appears After a Traditional FVG

The market may leave behind a clear FVG after an impulsive move. Once the price returns to that zone, the IFVG setup begins to form.

2. Quick Rejection From the Zone

Instead of consolidating and continuing in the same direction, the market sharply rejects the zone. It indicates smart money has collected the necessary liquidity and is ready to move the market.

3. Traps Traders on the Wrong Side

A hallmark of the IFVG is how it tricks breakout traders into entering in the wrong direction. The smart money intentionally revisits the zone to give the illusion of support and resistance continuation.

4. Follows or Precedes a Liquidity Sweep

Most IFVGs are tied to liquidity hunts. The market may sweep the highs or lows from the previous structure before making a strong reversal.

5. Forms Near Key SMC Zones

Look for IFVGs near:

• Previous FVGs

• Breaker blocks

• CHOCH zones

• Premium/discount arrays (in SMC terms)

These confluence areas strengthen the validity of the IFVG signal.

How to Trade Inverse Fair Value Gaps

Step 1: Identify the Original FVG

Look for a three-candle move that creates a fair value gap, usually after a strong impulsive move. Mark this zone and monitor it for a future revisit.

Step 2: Wait for Price to Revisit the Zone

Eventually, the price will return to test the FVG. At this stage, do not enter yet. Observe how the price behaves in the gap.

Step 3: Confirm IFVG Characteristics

Once the price touches the FVG, look for signs that it is rejecting the area:

• Sharp wick rejections

• Bearish or bullish engulfing after entry

• Liquidity sweep from equal highs/lows

• Drop in volume or failed breakout patterns

Step 4: Look for a CHOCH or BOS

Confirm the price is changing its pattern on a shorter timeframe (e.g., 15 minutes or 5 minutes). A change of character increases confidence that the IFVG is valid and the reversal is real.

Step 5: Enter With Tight Stop-Loss

After confirmation, enter the direction opposite to the trap. Position your stop-loss slightly beyond the wick or the high and low of the structure. It protects you from extended sweeps while minimising risk.

Step 6: Set Realistic Targets

Your take-profit can be set at:

• The next key structure level

• The origin of the previous move

• A Fibonacci level (e.g., 50% or 61.8%)

• A previous order block

• Be aware of upcoming news that may add volatility and adjust accordingly.

Example

Imagine the price rises above resistance, forming a bullish fair value gap. A few sessions later, it returns to test that zone. Many traders enter long again, expecting a continuation.

But instead, price quickly spikes into the zone, wicks the previous high, and immediately drops.

It is a classic IFVG:

• Price fakes continuation by re-entering the FVG.

• It sweeps liquidity above previous highs.

• Then, it reverses sharply, forming a new CHOCH and begins a bearish trend.

• If you had waited for the rejection and market structure confirmation, you could have entered a short position with low risk and high reward.

Common Mistakes to Avoid

Mistaking a Real FVG Fill for an Inverse Trap

Not every return to a fair value gap is a trap. Sometimes, price genuinely uses the zone as support and resistance. Only trade the IFVG when clear signs of manipulation and rejection are present.

Ignoring Higher Timeframe Structure

Always align your trades with the dominant trend. An IFVG targeting the main structure may still succeed, but your chances of success are diminished.

Entering Too Early

Patience is key. Let the market reveal its hand before jumping in. Wait for the CHOCH or BOS confirmation before executing your trade.

Conclusion

In conclusion, Inverse Fair Value Gaps are a nuanced, but powerful SMC concept that enables traders to detect fakeouts and enter before the real move begins. Unlike traditional FVGs that support continuation, IFVGs signal reversal through liquidity manipulation and psychological traps.

To effectively trade IFVGs, grasp their structure and context in SMC, employ confluences such as CHOCH, BOS, and liquidity sweeps, validate setups with lower timeframe entries, establish clear invalidation points, and refrain from trading them in isolation or counter to significant trends.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.