Order Blocks vs. Fair Value Gaps: The Ultimate Guide to Smarter Entries!

Summary

In this video, the host discusses two popular smart money entry strategies—order blocks and fair value gaps (FVGs). Both concepts are explained in detail, with emphasis on identifying high-probability entry points, analyzing market trends, and applying risk management techniques. Viewers learn how to spot order blocks and FVGs, how they can serve as key entry points, and the psychology behind choosing between them. With real chart examples, the video provides actionable insights for traders, helping them optimize risk-to-reward ratios and improve their trading decisions in different market conditions.

Takeaways

• 😀 Fair value gaps (FVGs) and order blocks are two popular entry strategies for smart money traders, each with its own advantages and challenges.
• 😀 FVGs are identified by an imbalance between buyers and sellers, forming a gap between the wicks of three consecutive candles, which can lead to price rebalancing.
• 😀 For smaller FVG zones, traders can set entries near the gap and place stop losses below key swing lows for a good risk-to-reward ratio.
• 😀 For larger FVG zones, it is advisable to zoom into lower timeframes to find more favorable entry points and reduce the risk of being stopped out.
• 😀 When multiple FVGs appear in a single move, traders should focus on the discount zone (below the 50% retracement level) for better chances of success in buying.
• 😀 Order blocks are marked by the candle that created the imbalance, and when the price pulls back to these areas, there is a higher chance of rejection, presenting a potential trading opportunity.
• 😀 Small order blocks may require larger stops or additional space to account for the potential fluctuation, while large order blocks might need confirmation on lower timeframes before entering.
• 😀 Successful trading with FVGs and order blocks depends on three rules: aligning with the market direction, collecting liquidity, and waiting for a break of structure.
• 😀 Aligning trades with the market direction increases the reliability of entries, as trades are more likely to be successful when they follow the dominant market trend.
• 😀 Identifying liquidity zones (equal highs/lows) helps traders avoid getting caught in liquidity grabs, ensuring more profitable and safer entries.
• 😀 A break of structure indicates strong momentum and trend continuation, making it a crucial signal for high-probability trades, especially when combined with FVGs and order blocks.

Q & A

What is the primary difference between Fair Value Gaps (FVGs) and Order Blocks?

Fair Value Gaps (FVGs) refer to the imbalances created between three consecutive candlesticks that suggest a price imbalance. Order Blocks, on the other hand, are the candles that initiate a price move, marking areas where smart money has entered the market. While both are used for entry points, FVGs focus on price gaps, and Order Blocks highlight areas where key decisions have been made.

Why is the risk-to-reward ratio important in smart money trading?

The risk-to-reward ratio is crucial because it helps traders evaluate the potential of a trade in terms of risk versus reward. A favorable ratio ensures that the potential reward outweighs the risk, increasing the chances of profitability in the long term. Traders aim for a ratio of more than 1:1 to ensure each trade has a reasonable chance of success.

What are the three key rules for identifying high-quality entry setups using FVGs and Order Blocks?

The three key rules are: 1) Aligning with the market direction to ensure trades are in the same direction as the prevailing trend, 2) Collecting liquidity, which involves identifying areas with liquidity such as equal highs or lows that may lead to price reversals, and 3) Looking for a break of structure, which indicates strong momentum that could lead to a trend continuation.

How should a trader approach a larger Fair Value Gap (FVG) zone?

When dealing with a larger FVG zone, a trader should zoom into lower timeframes to find more favorable entry points. This allows the trader to enter at a better price and improves the risk-to-reward ratio, reducing the chances of being stopped out by a wider gap.

What is the significance of the 50% retracement level when trading with Fair Value Gaps?

The 50% retracement level is important because it serves as a dividing line between the premium and discount zones. For buying trades, the ideal entry is within the discount zone (below 50%), while for selling, the premium zone (above 50%) is more favorable. This helps in reducing the risk of being caught in liquidity grabs or premature reversals.

Why is it suggested to wait for a pullback before entering a trade in strong market trends?

Waiting for a pullback before entering a trade helps in obtaining a better price. In strong trends, price may move sharply in one direction, and entering immediately may result in a poor entry with an unfavorable risk-to-reward ratio. A pullback provides a more optimal entry point.

What is a break of structure and why is it important in trading?

A break of structure occurs when price breaks through a significant level that had previously acted as support or resistance. This break indicates strong momentum, often signaling the continuation of the trend. It is important as it confirms that the market is not reacting temporarily, but that the impulse is likely part of a larger trend.

Why might Order Blocks be preferred over FVGs by some traders?

Order Blocks are preferred by some traders because they provide a more reliable entry point based on key price decisions, which often result in stronger price reactions. They also allow for better risk management, as traders can place stop losses above the candle initiating the move, offering a clearer risk-to-reward setup.

What should a trader do if they identify a large Fair Value Gap but cannot get a favorable risk-to-reward ratio?

If a trader identifies a large FVG but the risk-to-reward ratio is unfavorable, they should consider waiting for the price to enter the gap and then zoom into a lower timeframe to find a better entry point. This approach helps improve the risk-to-reward ratio and reduces the risk of being stopped out.

In the context of the Euro-Dollar pair on the 1-hour chart, why is the Order Block entry considered safer than the FVG entry?

The Order Block entry is considered safer because it allows for a more conservative and structured entry with a better risk-to-reward ratio. The FVG entry, while it may trigger quicker, often results in a larger stop loss, especially if placed within the gap zone, increasing the risk of being stopped out due to market fluctuations.