Order Blocks & Smart Money Concepts (SMC)

1. Understanding Smart Money vs. Retail Money

Retail traders usually trade based on indicators—RSI, MACD, moving averages—and often enter late or exit early. But institutions (smart money) cannot enter the market with huge volume suddenly. They need liquidity to fill their orders. So smart money:

Creates liquidity pools

Traps retail traders

Pushes price into zones where their orders are waiting

SMC tries to decode this behavior and trade with institutional flow.

The core belief of SMC is:
Price moves from liquidity to liquidity and respects institutional footprints like Order Blocks.

2. What Are Order Blocks?

Order Blocks (OBs) are the final candles where institutional buying or selling took place before a major price move. These candles reflect zones where big players opened positions.

Types of Order Blocks

Bullish Order Block

The last down candle before an impulsive up move (break of structure).

It shows smart money was buying.

Bearish Order Block

The last up candle before an impulsive down move.

It shows smart money was selling.

Why Order Blocks Matter

They represent areas where institutions left unfilled orders.

Price often returns (mitigation) to these areas before continuing in the original direction.

They provide high-probability entry zones with low stop-loss.

Characteristics of a Good Order Block

Strong displacement afterwards (fast, impulsive move)

Break of key market structure

Alignment with liquidity (e.g., sweep before displacement)

Imbalance or Fair Value Gap nearby

Higher timeframe confluence

3. Market Structure in SMC

SMC is heavily based on market structure: identifying the direction of the trend using swing highs and swing lows.

3.1 BOS – Break of Structure

A BOS occurs when price breaks a previous major swing high/low. It confirms trend continuation.

3.2 CHoCH – Change of Character

A CHoCH signals a trend reversal.
Example: In an uptrend, price forms a lower low → CHoCH → possible new downtrend.

Why Structure Matters

Order Blocks are validated only when a BOS or CHoCH occurs after them.
This proves smart money was indeed behind the move.

4. Liquidity in SMC

Liquidity is fuel for price movement. Smart money seeks liquidity to enter and exit positions.

Types of Liquidity

Equal Highs / Equal Lows (Double Tops/Bottoms)

Retail traders place stop orders here → liquidity pools.

Trendline Liquidity

Too-perfect trendlines attract breakout traders.

Buy/Sell Stops

Stops placed above highs or below lows are markets for institutional orders.

Imbalance / FVG Liquidity

Price returns to fill gaps to balance orders.

Liquidity Principle

“Price takes liquidity before reversing.”
This is where Order Blocks come into play—after grabbing liquidity, price mitigates an OB and then continues.

5. Fair Value Gaps (FVG) and Imbalances

An imbalance occurs when price moves so fast that there is insufficient trading between three candles (Candle A, B, C).
These gaps often get filled because smart money needs balanced positions.

FVGs often appear near:

Valid Order Blocks

Breaker Blocks

Mitigation Blocks

When price returns to these gaps, it becomes a high-probability entry.

6. Inducement: Retail Traps Before Real Move

Inducement is a clever liquidity trick used by institutions.

Example:

Price forms a small high near a bigger liquidity zone.

Retail traders enter early.

Smart money uses these small highs/lows as liquidity to tap, then moves to the real target.

Inducements typically appear:

Just before hitting an Order Block

Above equal highs

Below recent swing points

Understanding inducement helps avoid premature entries.

7. Mitigation: Why Price Revisits Order Blocks

After smart money enters the market with heavy orders, not all positions fill immediately.
So they bring price back to the order block to fill remaining orders.

This return is called mitigation.

Mitigation Concepts

Price taps the OB, grabs liquidity, and continues in the main direction.

It removes institutional drawdown.

It confirms OB validity.

A successful mitigation is one of the strongest signals for trend continuation setups.

8. How to Trade With Order Blocks (SMC Strategy)

Below is a simplified but effective approach:

Step 1: Determine Market Direction

Use BOS and CHoCH to identify trend or reversal.

Uptrend → focus on Bullish Order Blocks

Downtrend → focus on Bearish Order Blocks

Step 2: Mark High-Probability Order Blocks

Select Order Blocks that have:

Strong displacement

BOS confirmation

Nearby liquidity sweep (e.g., equal highs taken)

Nearby FVG (imbalance)

Step 3: Wait for Price to Return

Patience is key. Price almost always returns to OB for mitigation.

Place Buy Limit at Bullish OB

Place Sell Limit at Bearish OB

Step 4: Stop-Loss and Take-Profit

SL: Below OB (for bullish), Above OB (for bearish)

TP Levels:

Next liquidity pool

Opposite OB

FVG fill

This ensures positive risk-reward ratios (1:3 or higher).

9. Example: Bullish Order Block Workflow

Price sweeps liquidity below equal lows.

A strong bullish move creates displacement.

A BOS confirms institutional strength.

Identify the last down candle (bullish OB).

Price returns and mitigates OB.

Enter long position.

Target next liquidity pool above.

This is considered a textbook SMC setup.

10. Limitations of SMC

Although powerful, SMC requires practice.

Challenges

Order Blocks appear frequently; choosing the wrong one is common.

Market structure can be subjective for beginners.

Liquidity grabs may fake out traders.

News events disrupt SMC setups.

SMC should always be combined with:

Timeframe confluence

Session timing (London/NY sessions are best)

Risk management rules

11. Why SMC Works

SMC aligns with institutional behavior, making it uniquely accurate for:

Understanding market manipulation

Identifying highly precise entries

Reducing drawdown

Avoiding false breakouts

Trading with low risk, high return

Institutions leave traces—Order Blocks, FVGs, BOS, inducements.
SMC helps retail traders read these footprints.

Conclusion

Order Blocks & Smart Money Concepts (SMC) form a powerful trading framework focused on understanding institutional behavior. By studying liquidity, market structure, BOS, CHoCH, FVG, and mitigation, traders can read the true intention behind major price movements. Order Blocks act as the foundation of SMC, giving precise, low-risk entries aligned with smart money flow. With discipline, patience, and multi-timeframe confluence, SMC becomes one of the most effective and accurate price-action trading methods available today.