Order Blocks and Fair Value Gaps: Reading Smart Money Imbalances

An order block is the last opposing candle before a strong, decisive move away from it -- the last down candle before a sharp rally, or the last up candle before a sharp drop. The idea behind it is that a large player (a bank, a fund, an institution) built a position around that candle, and price often returns to that zone later to "retest" it before continuing, because that's where the large player's remaining orders are thought to sit. Traders using this concept look for price to return to an order block as a potential entry area, in the direction of the original strong move.

A fair value gap (FVG), also called an imbalance, is a three-candle pattern where the middle candle moves so fast and so far that it leaves a visible gap between the wick of the first candle and the wick of the third -- a price range that was barely traded through, if at all. Because so little trading happened in that zone, the idea is that price is statistically likely to return to it at some point to "fill" the gap, trading through the range properly before continuing its broader direction.

Both concepts are ways of describing the same underlying idea from Module 6's Smart Money Concepts introduction: markets rarely move in a straight line without leaving trace evidence of where large orders were placed or where price moved inefficiently. Order blocks and fair value gaps are two of the most commonly used tools traders use to mark those zones on a chart and build entries around them, usually combined with the liquidity and market-structure concepts covered earlier in this module -- none of them work reliably in isolation.

It's worth being honest about the limits here: order blocks and FVGs are pattern-recognition tools built on a theory about institutional behavior, not a guaranteed mechanical system. They're widely used, but like any technical concept they need to be combined with risk management and tested on a demo account before being trusted with real capital.