Smart money: order blocks, FVG, liquidity
What you learn in 3 minutesThis lesson builds a vocabulary for the places where large orders are assumed to sit: order blocks, fair value gaps and liquidity. None of these terms describes something you can see directly on a chart. They describe an assumption about where bigger participants may have left orders behind.
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.
The mistake 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.