Smart money: order blocks, FVG, liquidity
Where the three words come from on a price chart
Open a chart of EUR/USD and set the time frame to fifteen minutes. Each candle shows four prices: the open, the high, the low and the close. The three words in this lesson are all ways of pointing at a group of candles. The words do not change what the chart shows. They are labels for shapes that already exist.
An order block is a candle where price paused before a sharp move. Suppose EUR/USD trades at 1.0850, then falls quickly to 1.0820. The candle just before the fall is often called an order block. The label assumes large sell orders sat there. The chart only shows that price paused, then moved. The pause is visible. The orders behind it are not.
A fair value gap is a stretch of chart with little trading in it. It appears when one candle's range does not overlap the candle two places before it. On EUR/USD, a gap might cover 1.0835 to 1.0845. Price moved through that zone quickly, so few trades happened there. The gap is a fact about the chart. The idea that price must return to fill it is an assumption.
What liquidity means when the chart shows a high or a low
Liquidity is a cluster of stop orders near an obvious high or low. If EUR/USD has touched 1.0850 three times in a day, many stop orders sit just above that level. A stop order becomes a market order when price reaches it. So a move through 1.0850 can trigger a burst of buying. The burst is the liquidity being taken. The chart shows the move. It does not show the orders.
The assumption is that large participants push price toward those clusters to fill their own orders. That may be true sometimes. It is not a rule. The same cluster can be triggered by a news release, by a quiet market, or by a single large order from a fund. The chart cannot tell you which. What you see is a level that many people watched. What you assume is why price went there.
The three words share one idea: large orders are assumed to sit at certain places. An order block points to a pause. A fair value gap points to a fast move. Liquidity points to a cluster of stops. None of them is a signal. Each is a name for a place on the chart where the assumption is easier to make. The assumption is the part you have to test.
How to test the assumption without risking much
Pick one assumption and write it down before you look at the next chart. For example: price will return to a fair value gap before continuing. Then mark every gap you can find on EUR/USD over twenty days. Record what price did next. You are not looking for a win rate. You are looking for whether the assumption held more often than it failed. If it held half the time, the label adds nothing.
The test costs nothing because it is on paper. When you do trade, size the position so that being wrong is survivable. One pip on a standard lot of EUR/USD is about ₱580 at 1.0850. A 35 pip stop would be about ₱20,300. That figure moves with the peso conversion rate, so treat it as an estimate. The broker may also charge a spread and hold a swap overnight. Those costs change the figure.
The question to ask is not what the pattern means. The question is what would have to be true for the assumption to fail. If price sweeps below a recent low and then closes back above it, the sweep filled stops. The close back above says the move did not hold. That is two events, not a prediction. You can describe both without claiming to know what happens next.
One pip on EUR/USD at 1.0850
| Step | Amount | Note |
|---|---|---|
| Standard lot size | 100,000 units | the contract size the pip formula uses |
| One pip in the quote currency | 10 units | 100,000 x 0.0001 |
| Conversion to pesos | ₱580 | 10 units x ₱58 per unit, the rate used here; your broker's rate will differ |
| Move of 20 pips | ₱11,600 | 20 x ₱580, the same arithmetic scaled up |
The broker may round the conversion rate, charge a spread on entry and exit, and hold a swap if the position stays open overnight. The peso figure changes with the exchange rate, so treat it as an illustration, not a quote.
Doing it once, step by step
You will mark one assumption on a chart, record what price does next, and then price the risk in pesos. Do the steps in order, on paper first.
- 01
Open a fifteen minute EUR/USD chart
Set the time frame to fifteen minutes and scroll back twenty days. Do not add indicators yet. You are looking for the three shapes: a pause before a move, a gap with little overlap, and a level touched more than once. Mark each one with a line or a box.
- 02
Write one assumption in a sentence
Choose one shape, such as a fair value gap. Write: price will return to this gap before continuing. Keep the sentence short and specific. You will test this one assumption, not all three at once.
- 03
Record what price did next
For each mark, note whether price returned to the gap within the next twenty candles. Write yes or no. Do not write a reason. After twenty days of marks, count the yes and no answers. The count is the test.
- 04
Convert one pip to pesos
One pip on a standard lot of EUR/USD is about ₱580 at 1.0850. Multiply that by the number of pips in your stop. A 35 pip stop gives 35 x ₱580 = ₱20,300. The peso figure moves with the exchange rate, so it is an estimate.
- 05
Add the costs the broker charges
Ask your broker for the spread on EUR/USD and any swap for holding overnight. Add the spread to your entry and exit. If you hold past the daily close, add the swap. These costs are separate from the pip value.
- 06
Size the position so a loss is survivable
Decide the most you are willing to lose on one trade. Divide that amount by the peso value of your stop. If your stop is ₱20,300 and you will risk ₱2,000, the position must be smaller than one standard lot. The calculation uses the numbers you wrote down, not a feeling.
The mistake most people make here
The common mistake is to treat these three terms as a system that tells you what happens next. They do not. An order block is only a candle where price paused before moving; a fair value gap is only a stretch of chart with little trading in it; liquidity is only a cluster of stop orders near an obvious high or low. The assumption that large orders sit there is reasonable, but it is still an assumption. Instead of asking what the pattern means, ask what would have to be true for the assumption to fail, and size the position so that being wrong is survivable.Check yourself
If one pip on a standard lot of EUR/USD is ₱580, what is a 35 pip move worth?
35 x ₱580 = ₱20,300. The figure moves with the peso conversion rate, so it is an estimate.
Price sweeps below a recent low, then closes back above it. What are the two events being described?
The sweep is the move below the low, where resting stop orders are assumed to be filled. The return is the close back above it, which is read as a sign that the move did not hold.
Questions that come up next
How much is one pip on EUR/USD in pesos?
At 1.0850, one pip on a standard lot is about ₱580. That figure comes from the pip value in dollars converted to pesos. The conversion rate changes every day, so the peso amount changes with it. Your broker may also round the rate. Treat the figure as an illustration, not a quote.
Does a fair value gap always get filled?
No. A gap is only a stretch of chart where few trades happened, so price moved through it quickly. Price often returns to such zones, but it does not have to. Sometimes price leaves the gap behind and never comes back. The idea that it must be filled is an assumption, not a rule.
What is the difference between an order block and a normal candle?
There is no difference in the chart itself. An order block is a label you put on a candle where price paused before a sharp move. The candle looks the same as any other. The label carries an assumption about large orders sitting there. The pause is visible; the orders are not.
How do I know if liquidity has been taken?
You see price move through a level that many people watched, such as a recent high or low. Stop orders near that level are assumed to become market orders, which can add to the move. The chart shows the move. It does not show whose orders were filled or why. A news release can cause the same move.
Can I trade using only these three terms?
They are a vocabulary, not a system. Each one names a place on the chart where an assumption is easy to make. Nothing in them says what happens next. If you use them, write down what would prove the assumption wrong. Then size the position so that being wrong is survivable.
Why do the terms appear so often in chart videos?
They give a name to shapes that already exist on the chart, which makes a video easier to follow. The names sound like inside knowledge, but they are only labels. The assumption behind them is the part worth checking. A label is not evidence.
The words used on this page
- Order block
- A candle where price paused before a sharp move. The label assumes large orders sat there. The chart only shows the pause, not the orders.
- Fair value gap
- A stretch of chart where one candle's range does not overlap the candle two places before it. Price moved through quickly, so few trades happened there. The gap is a fact; the idea that price must return is an assumption.
- Liquidity
- A cluster of stop orders near an obvious high or low. When price reaches them, the stops become market orders. The chart shows the move, not the orders.
- Stop order
- An instruction to buy or sell once price reaches a set level. It becomes a market order at that level. Many stops sit near recent highs and lows.
- Standard lot
- A fixed trade size used in the pip example on this page. One pip on a standard lot of EUR/USD is about ₱580 at 1.0850. The peso figure moves with the exchange rate.
- Assumption
- Something you treat as true without proof. Here it is the idea that large orders sit at certain places. The chart cannot confirm it, so you test it and limit the cost of being wrong.
What to take away
- Order block, fair value gap and liquidity are names for places on a chart, not signals.
- Each name rests on one assumption: large orders sit there. The chart shows the shape, not the orders.
- Before using a term, write down what would prove the assumption wrong.
- Size the position so that being wrong is survivable, and treat peso figures as estimates.