As a SMC trader, this is how i think when looking at the chart:
1. Psychological level
This is where the price has the most liquidity and volatility. Limit and target hits quickly. This is why i love it.
2. Consolidation (Support, Resistance, Order Blocks)
I love to imagine the bid and ask battle as a key factor in market debates, with people often discussing whether a level is good for buying or selling. For example, traders might say, "I've made enough profit, I'll sell some/all," or "I think it's confirmed to go even higher, I'm buying now/buying more." However, not many understand why order blocks or support/resistance levels work as price bounce points.
Consolidation is historical; you can't claim price is consolidating if it isn't. This is a crucial point. When you observe the history of a "battle" that occurred at a certain price range, you can actually trace that event back to those bouncing levels (order blocks and support/resistance) on higher timeframes.
When you mark order blocks, support, or resistance, you're identifying ranges of consolidation on lower timeframes. As a retail trader, I approach this by setting certain bounce criteria to determine my support and resistance levels: the more times a level has bounced, the more I trust it.
As a Smart Money Concept (SMC) trader, the longer the bid and ask battle has occurred at a particular level in the past, and the more often price revisits that level, the more traders have anticipated buying there. If buyers eventually win the "war," they will sweep away all the sellers, pushing the price higher than just that level. However, at some point, the buyers become exhausted, and some of their previous allies may turn against them—these are the "undead" sellers. With external factors joining the fray, the buyers are swept away rapidly, forming a strong order block and creating a fair value gap. The price then drops significantly below the range, looking for new buyers to "kill" in the next cycle.
3. Fair Value Gap
Price move so fast that it leaves a lot of limit orders behind. "It has to be filled" some people said. No, market does not care about your opinion. Price goes to wherever it wants driven by the majority of money. I would say fair value gap is relative, what i see in 4h timeframe can't be seen in 1h timeframe. It's about looking for a reason or answer why things don't happen as you expect. If i see gap in 5m timeframe, it is less likely to be filled if 1m timeframe has no gap. This is the key statement "When price slowly push price only in 1 direction in lower timeframe, it is considered fast in higher timeframe, therefore forming fair value gap". Fair value gap with this criteria is high likely to be filled in "brutal" way.
What you see in the picture above is fair value gaps that get "brutally" mitigated. Dashed line with orange color means it is fully mitigated (the lowest point of fair value gap), while dashed line with white color means it is partially mitigated (Price once hit only at a few portion of that fair value gap. If you see carefully, there are 3 old fair value gaps that got mitigated in 15m timeframe during Bitcoin's wick at 90k. But why didn't it bounce at the fair value gaps? Why did it go far deeper below the fair value gaps? And why it suddenly bounces back to 100k in no time? Are you wondering why? Let's go to liquidity
4. Liquidity
To sum it all up, everything is about supply and demand, the key point of liquidity.
Remember the consolidation we were talking about where bid and ask war happen at certain level? This creates liquidity at those levels. Majority of buy and sell orders are always in consolidation (support / resistance) level. Now, i like to put it this way to keep it simple:
Simple Simulation of Selling a Market Order:
Imagine you are a very rich person and you want to execute a sell market order for 100 lots at the current Bitcoin price of $100k, but there are buy orders only at the following levels:
$95k: 30 lots
$92k: 20 lots
$90k: 50 lots
Execution Steps:
Sell Market Order at $100k:
You place a market sell order for 100 lots at the current price of $100k.
Sell Order Filling:
Since you are selling, the order will match with the buy orders that are available. The available buy orders are at lower prices, so your sell orders will "eat" through the buy orders at progressively lower prices, causing the price to move down.
First, the 30 lots at $95k will be filled.
The price will drop to $95k, and there will be 70 lots remaining (100 - 30).
Second, the 20 lots at $92k will be filled.
The price will drop further to $92k, leaving 50 lots remaining (70 - 20).
Third, the 50 lots at $90k will be filled.
The price will drop further to $90k, and the sell order will be fully executed (50 - 50 = 0 lots).
Final Result:
The price moves from $100k to $90k as your sell market order consumes the available buy orders at lower prices.
The final price after executing the order would be $90k.
Your question is insightful—it's not as complicated as it seems. The price should have bounced at those fair value gaps, but the limit orders weren’t enough to absorb all the massive sell orders. The sell orders were too large. But why did the price bounce at $90k and return to $100k? Let's go back to point number one: Psychological price levels. The remaining strong limit orders were there, which we can refer to as buy-side liquidity. However, keep in mind that this level isn’t the only one that could cause the price to bounce.
Why the Bounce at $90k and Return to $100k:
The Reduction of Massive Sell Orders:
The massive sell orders were mostly absorbed by the fair value gaps and minor support and resistance levels. If, for example, there had been no buy orders at $92k, the price would have likely dropped further below $90k until it found other buy orders large enough (such as 20 lots). This is why liquidity at different levels plays a crucial role in price movement.Massive Buy Orders at $90k:
At $90k, the sell orders were largely absorbed, and massive buy orders started to accumulate at that price. This can be seen as the opposite side of the market (buy-side liquidity) because most of the selling pressure had already been filled. This created a similar scenario to the one in the simulation above but on the buy side.
The Brutality of Mitigating Fair Value Gaps:
Now, to explain why mitigating the fair value gaps created by a lower timeframe, where price slowly moves in one direction, is so "brutal":
Let's visualize this with the chart or concept you're referring to.
Notice how price slowly move up then get wicked which is marked as orange circle. The faster it goes up, the bigger the wicks.
Now you see, mostly brutal wicks happen when bigger timeframe want to seek more liquidity. Always keep in mind that most of the orders were already filled in previous levels (Fair value gaps, Support, Resistance, Order Blocks). Here is the explanation:
Bid and ask "battle" did not take place at fixed level long enough. Consolidation is very crucial to happen, it reflects historical event where most people would buy and sell, so it would trigger people to buy or sell at those levels in the future. But in this scenario, buyers and sellers almost equal but buyers still dominate, so it pushes the price higher slowly in this timeframe. The less consolidation it has, the less buyer group at that level, so the buy orders are highly spreaded. Imagine in the market orders simulation i provided, if the buy lot only has 5 lots every $1k below like this:
Current price 100k. Sell market order 100 lots.
Buy at 99k: 5 lots
Buy at 98k: 5 lots
Buy at 97k: 5 lots
and so on
Then the price will end up at 80k (100k - 100 / 5* 1k), but if the consolidation was long enough, it can attract more buyers:
Buy at 99k: 20 lots
Buy at 98k: 10 lots
Buy at 97k: 30 lots
Buy at 96k: 50 lots
Buy at 95k: 100 lots
Then price will stop at 96k.
Now you see the picture above, a big fair value gaps created in daily timeframe, meaning buyers dominated the market, but it did not get filled yet. Now take a look what happens at lower timeframe.
In lower timeframes, the price tends to have fewer unmitigated fair value gaps because it has likely already touched and mitigated most of these gaps. This brings us back to point number 3: it doesn't have to be filled, and price just follows the majority of market participants.
Now, if the market ever wants to mitigate a daily fair value gap, consider number 2: look at how long the consolidation took place. If the consolidation period wasn’t long enough, the price is less likely to bounce at that level. But if the consolidation lasted long enough, the price is more likely to bounce at that level.
Think of all of this as number 4, liquidity. And always remember, this is about probability. You can't expect 100% certainty in market movements. Trying to predict market bounces with absolute certainty is like me trying to predict whether you'd want to sell BTC at $100k for 100 lots. I don't even know you. At the same time, I'm trying to predict if you will sell 100 lots and whether there will be enough buy orders to stop your sell order at the exact price I want. This is simply impossible.
At this point, after reading this, I hope you have a deeper understanding of market behavior and that you can apply this mindset when analyzing charts. Blind bias will only destroy your trading. Always have a reason for why things might go wrong, so you don’t make unrealistic emotional decisions that can blow your account.
Mastering and integrating these concepts will forever change the way you perceive price movements on a chart.
This principle applies across all timeframes—markets are indeed fractal. And when it comes to cryptocurrency, I personally believe that your timezone or the latest news doesn’t matter as much as people think. For example, predicting price movements based on my setup is like trying to predict the outcome of upcoming CPI news. We’ll discuss this further another time. Follow for more insights!
