Smart money: order blocks, FVG, liquidity
The point is to read the words the way the platform uses them, then test the assumption rather than trust it. On AUD/USD around 0.6640, one pip on one standard lot is 10 units of the quote currency, so a 20 pip move on 0.10 lots is A$20 before any costs.
Order block as a named area on the chart
An order block is a price area where the chart shows a sharp move away after a pause. The word block is used because the area is drawn as a rectangle. The platform does not label it for you. A person marks it by eye or with a tool.
The assumption is that large orders were left in that area. Those orders are thought to be unfilled. If price returns, the same orders may still be there. That idea is a belief about other participants. It is not printed on the chart.
On AUD/USD around 0.6640, a block might be marked from 0.6620 to 0.6630. The width is 0.0010, which is 10 pips. The block does not say what will happen next. It only names an area where a reaction was seen once.
Fair value gap as a space price skipped
A fair value gap is a run of prices where no trading took place between two candles. The word gap describes that empty space. The word fair is a judgement, not a measurement. The platform shows the space but not the fairness.
The assumption is that price will return to fill the gap. Filling means trading through those prices later. Nothing forces a return. The gap can stay open for a long time or never be filled.
On AUD/USD, a gap might sit between 0.6635 and 0.6645. That is a 10 pip space. If price later trades at 0.6640, the gap is partly filled. The chart records the visit. It does not record why.
Liquidity as a label for resting orders
Liquidity means the ease of buying or selling without moving the price much. In this vocabulary, it also names places where orders are thought to rest. Those places are often near recent highs or lows. The word describes a condition, not a visible object.
The assumption is that large orders sit just beyond those highs and lows. A sweep is a quick move through such a level. After the sweep, price may turn. The turn is taken as evidence that the orders were there.
On AUD/USD, a sweep might run from 0.6640 to 0.6605 and then return to 0.6635. The move down is 35 pips. The return is 30 pips. The numbers are facts. The reason for the turn is an assumption.
A block, a sweep and a return on 0.10 lots
| Step | Amount | Note |
|---|---|---|
| Instrument and price | AUD/USD near 0.6640 | the level used for every figure below |
| Block marked on the chart | 0.6620 to 0.6630 | a small range where price stalled before moving up |
| Liquidity sweep | price dips to 0.6605 | below the block, where resting orders are assumed to sit |
| Return to the block | price comes back to 0.6625 | the middle of the marked range |
| Distance from sweep to return | 20 pips | 0.6625 minus 0.6605 is 0.0020, which is 20 pips |
| Value of that move on 0.10 lots | A$20 | one pip on one standard lot is 10 units of the quote currency, so 20 pips on 0.10 lots is 20 x 10 x 0.10 |
The broker sets the spread, commission and swap, and these vary between brokers. The A$20 figure ignores all of them and assumes the price you get is the price on the chart.
Doing it once, step by step
The following steps describe one way to mark these areas and check the risk before any order is placed. Do them in order, on a demo chart first.
- 01
Open a chart of AUD/USD on a demo account
Set the chart to a time frame you can read, such as one hour. Find the current price, which might be near 0.6640. Do not place any order yet. The goal is only to look.
- 02
Mark one order block by hand
Find a sharp move away from a pause. Draw a rectangle around the pause. Note the high and low of the rectangle. For example, 0.6620 to 0.6630 is 10 pips wide.
- 03
Mark one fair value gap
Look for two candles with a space between them where no price traded. Draw a box over that space. Write down the top and bottom. A gap from 0.6635 to 0.6645 is 10 pips.
- 04
Note one liquidity level
Find a recent high or low that price has touched more than once. Mark that level with a horizontal line. This is where orders are assumed to rest. Do not assume they are there.
- 05
Write the price that proves the idea wrong
For each mark, choose a price where the idea fails. If the block is from 0.6620 to 0.6630, a close below 0.6620 might show it is not working. Write that number beside the mark.
- 06
Calculate the money at risk before any order
Measure the distance from your entry to the failure price in pips. One pip on one standard lot is 10 units of the quote currency. On 0.10 lots, 20 pips is A$20 before costs. The broker sets the spread, commission and swap, and these vary between brokers. If the amount is too large for the account, reduce the lot size.
The mistake most people make here
The common mistake is to treat a marked block as a promise that price will turn there. It is a drawing on a chart, and the assumption behind it may be wrong on any given day. A second mistake is to size a position from the block alone, without checking what the move would cost if the block fails. Instead, mark the level, note the price that would show the idea is not working, and work out the money at risk before the order goes in. If the numbers do not suit the account, the answer is a smaller position, not a stronger belief in the block.Check yourself
Price sweeps to 0.6605 and returns to 0.6635. How many pips is that, and what is it worth on 0.20 lots?
0.6635 minus 0.6605 is 0.0030, which is 30 pips. One pip on one standard lot is 10 units of the quote currency, so 30 pips on 0.20 lots is 30 x 10 x 0.20, which is A$60 before costs.
A block is marked from 0.6620 to 0.6630. What is the width of the block in pips?
0.6630 minus 0.6620 is 0.0010, which is 10 pips.
Why does the lesson say a fair value gap is an assumption rather than a fact?
Because it describes a gap in price that is assumed to attract a return visit, not a rule the market has to follow. The chart shows where price did not trade, and the meaning given to that space comes from the trader, not from the platform.
Questions that come up next
Who decides where an order block starts and ends?
The person marking the chart decides. The platform draws candles and nothing else. Two people can look at the same AUD/USD chart and mark different rectangles. That is why the block is a reading of the chart, not a fact the chart states.
If a fair value gap is never filled, what does that show?
It shows that the assumption did not hold that time. Price traded on without returning to the space. The gap can stay open for a long time or never close. A gap that stays open is not proof of anything about the next move.
Does a sweep prove that large orders were sitting there?
No. A sweep is a fast move through a level, and that move is visible. The orders behind it are assumed, not seen. The turn afterwards is often offered as the evidence, but a turn can happen for many reasons. The assumption stays an assumption.
Can these areas be used on their own to decide a position size?
No. The block only names an area on the chart. The size has to come from the money at risk if the idea fails. Mark the level, note the price that would show the idea is not working, then work out the cost. If the number does not suit the account, use a smaller position.
What costs sit outside the pip arithmetic?
The spread, commission and swap are set by the broker and vary between brokers. The pip sums on this page ignore all of them. They also assume the price you get is the price on the chart. In a fast market the price you get can differ.
Why does the lesson use AUD/USD in the examples?
Because the numbers are easy to follow on one instrument. Around 0.6640, one pip on one standard lot is 10 units of the quote currency. Every sum on the page is built from that figure. The same arithmetic works on other pairs, but the pip value changes with the quote currency.
The words used on this page
- order block
- A price area drawn as a rectangle where the chart shows a sharp move away after a pause. The name comes from the shape, not from anything the platform marks. It is assumed that unfilled large orders sit there.
- fair value gap
- A run of prices where no trading took place between two candles. The word gap describes that empty space, and fair is a judgement rather than a measurement. It is assumed that price will return to trade through the space, but nothing forces a return.
- liquidity
- The ease of buying or selling without moving the price much. In this vocabulary it also names places where orders are thought to rest, often near recent highs or lows. It describes a condition, not an object you can point to.
- sweep
- A quick move through a level where orders are assumed to sit. The move itself is visible on the chart. The reason for it is an assumption about other participants.
- pip
- The smallest common step in a currency price, shown as the fourth decimal place on AUD/USD. On one standard lot, one pip is 10 units of the quote currency. Every money figure on this page is built from that.
- standard lot
- A fixed position size used as the reference for pip values. One pip on one standard lot is 10 units of the quote currency. Smaller sizes scale the figure down in proportion.
What to take away
- An order block, a fair value gap and a liquidity level are names for areas on a chart, not objects the platform shows you.
- Each one carries an assumption about where large orders may sit, and that assumption can be wrong on any given day.
- Mark the level, note the price that would show the idea is not working, and work out the money at risk before the order goes in.
- The broker sets the spread, commission and swap, and these vary between brokers, so the pip sums here are not the full cost.