Support and Resistance: Order Blocks and Fair Value Gaps

Support and resistance have long been the main technical tools in trading to identify key price zones on the chart. However, it often happens that the price first goes through them, and only then it reverses in the opposite direction.

If you used these concepts in your trading and, like many others, have been stopped out on a “fake breakout,” here’s something that might help you improve your strategy by taking a completely different yet similar approach.

In this article, we will explore the concepts of Order Blocks (OB) and Fair Value Gaps (FVG), a revolutionary method for analyzing market dynamics and identifying perfect entry points with high risk-reward on the chart.

Support and resistance: Main principles

Support and resistance levels are horizontal price areas where markets historically reverse or consolidate. They emerge due to psychological price barriers where traders expect buying (support) or selling (resistance) pressure. 

These levels can be identified manually or through technical indicators, and they serve as the basis for many trading strategies, including breakout and mean-reversion approaches.

However, traditional support and resistance have limitations. Firstly, they do not account for the reasoning behind price reactions, merely highlighting historical levels. Also, they can be subjective, as traders often draw levels differently. Lastly, they do not reveal the presence of institutional orders or liquidity voids.

The institutional perspective: OB and FVG

Order Blocks and Fair Value Gaps, derived from Smart Money Concepts (SMC) and Institutional Order Flow (IOF) theories, provide a more sophisticated framework by focusing on how large financial institutions and liquidity providers operate within the market.

Order Blocks (OB)

An Order Block is a price region where institutional traders have placed large orders, creating a significant shift in price action. These blocks typically form before major trends or reversals, signifying areas where traders have massively entered the market. 

Unlike traditional support and resistance, OBs are not just arbitrary levels but have concrete rules to be marked on the chart:

1. It is best to trade OBs in the direction of the main trend.
2. A break of structure (BOS) or a CHoCH must occur for the OB to be valid.
3. The OB must be marked by a rectangle whose edges completely envelop the last candle, which has the opposite color of the trend.
4. When an OB has been retested by price, it becomes weaker. You should look for untested OBs.

Here is an example of a EURUSD 4H chart, explaining how you should mark Order Blocks:

As you can see, the dominating trend is bearish, which means we should only look out for bearish OBs. A minor pullback on the left side of the chart occurs, but ultimately the trend resumes bearish, breaking the structure to the downside (BOS).

At this point, we mark our Order Block – the last green candle of the short bullish trend. After a while, the price fails to test the OB by a few pips and proceeds lower. Remember that the risk of an OB being never retested can always happen.

Lucky for us, after some more time price pulls back into the OB and violently resumes being bearish. Here, you can open your short position.

Place the Stop-Loss just above the OB and let the trade unravel.

Fair Value Gaps (FVG)

A Fair Value Gap, also known as a “price imbalance” occurs when there is an imbalance in price action, leading to a visible gap between candlesticks. This usually happens during periods of high volatility, where aggressive buying or selling leaves inefficient price action. The market often returns to these gaps to "rebalance" liquidity before resuming its trend.

Like Order Blocks, FVGs also have a determined set of rules:

1. FVGs appear when the wicks of the previous and the next candle fail to cover the body of the candle or the gap between them completely.
2. A FVG must be marked as a rectangle with the edges touching the top of the wick of the previous candle and the bottom of the wick of the next candle.
3. Prices do not like to leave imbalances behind. Often, tradeable securities tend to fill the gaps left behind by 50-75% of their volume. Sometimes, FVGs are filled.
4. When a FVG has been retested by price, it can be deleted from the chart. You should look for untested FVGs only.
5. FVGs work best on higher timeframes (more than the 1H)

Difficult? Don’t worry. It is easier to understand the FVG by looking at a real example:

On the left side of the chart, we see a strong bullish candle. At the same time, the wicks of the candles it is between fail cover the body, leaving a wide void. This is your first FVG. Soon after, TSLA opens with a gap to the upside – the area of the gap between the previous and next wick is your second FVG.

As per rule 3 of the FVG, the upper one gets filled. There is always the risk of a FVG being filled, but these situations can be filtered out.

For instance, like in the TSLA case above, if you have more than one FVG form one after another, the first one to appear is always the strongest.

Exactly like that, after filling the second FVG and breaking it, the price retests the first FVG and bounces off it to the upside.

Later, another price gap forms. Mark the FVG as you did before for the filled one. After getting retested multiple times, the price leaves to the upside with strong momentum.

Trading the FVG is simple: Enter when the price retests and bounces off the area. Place your SL on the opposite edge and wait for the trade to develop. 

Conclusion

While support and resistance remain valuable tools, they lack the depth and precision of the OB and the FVG. Modern trading strategies benefit from a more sophisticated approach that accounts for institutional order flow, liquidity imbalances, and high-probability trade setups. By incorporating OBs and FVGs, traders can move beyond traditional technical analysis and align themselves with the true forces driving the market.

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