Order blocks and fair value gaps

Footprints in the sand

When someone runs across a beach, they leave footprints. Smart money concepts look for two kinds of footprints left behind by big, fast moves. Both only count after a strong move (displacement) that breaks an important high or low.

Footprint 1: the order block

An order block is the last candle of the opposite color before a strong move.

• Bullish order block: the last red candle before a big push up.
• Bearish order block: the last green candle before a big push down.

The idea: big players were quietly loading up their orders in that candle, right before price took off. When price comes back to that spot later, they may defend it, so price often reacts there.

Rules that make an order block count:

1. It's the opposite color from the move that follows.
2. The move after it is strong, not just a small push.
3. That strong move breaks an important high or low.

Footprint 2: the fair value gap

A fair value gap (FVG) is made by three candles:

• Candle 1: a normal candle.
• Candle 2: a big, fast candle.
• Candle 3: another candle that doesn't overlap candle 1.

In a bullish gap, the high of candle 1 and the low of candle 3 never touch. The space between them is the gap. Price moved through it so fast that hardly any trading happened there.

Think of running up the stairs so fast you skip three steps. Later, you might come back down to check those steps. Price often comes back to a gap to "fill" some of it before moving on.

An example rule set

Made up, just to see the shape:

1. Price sweeps a low, then makes a strong move up that breaks the last high.
2. Mark the order block (last red candle before the move) and any fair value gap the move left.
3. Wait for price to come back into that zone. Don't chase.
4. Entry: when price shows it's turning up again inside the zone, for example a bullish candle or a small break up on a smaller chart.
5. Stop: just below the low of the order block.
6. Target: the next pile of orders above, like an old high.

Say the order block runs from $48 to $50. Price dips back to $49 and turns up, so you get in at $49.50. The stop goes just under the block at $47.80, risking $1.70. The old high at $54 is about $4.50 away.

When it works

With the bigger trend, right after a clear sweep and a strong move, on the first return to the zone. Later visits tend to be weaker.

When it fails

• Zones everywhere. If you look hard, you can find a red candle before every green move. Without a strong move and a break of an important level, it's just a candle.
• Choppy markets. Order blocks in the middle of a sideways mess mean very little.
• Price slices through. Sometimes price comes back to the zone and doesn't even slow down. The stop keeps that a small loss.
• Hindsight. Perfect footprints are easy to spot on old charts. That's why these rules must be tested on charts you haven't seen yet. Level 8 shows how.

Remember

• An order block is the last opposite-color candle before a strong move.
• A fair value gap is three candles where candle 1 and candle 3 don't touch.
• Both only count after a strong move that breaks an important high or low.
• Wait for price to come back and react. The stop goes just past the zone.