When technical analysis is observed in depth, there are many concepts that may appear common or simple at first glance. However, when these concepts are learned and understood correctly, they have the potential to significantly improve and transform trading performance. Technical analysis offers a wide range of indicators and methods through which trading can be made easier, provided the trader follows proper risk management and discipline.
Every indicator and method has its own unique characteristics, strengths, and limitations. This is the primary reason traders differentiate between leading and lagging technical analysis. Although leading and lagging analysis differ in nature, they are not contradictory to each other. In fact, both are equally important. It is well understood that excessive use of leading indicators often promotes early-exit bias, while lagging indicators tend to amplify emotions such as fear and greed. In reality, when both approaches are followed with proper theory, discipline, and structure, they can together form one of the most effective and robust trading strategies.
With this understanding, today we will discuss a simple yet effective trading analysis framework. In this discussion, we will not only simplify technical terminology but also explain how to use these concepts practically, along with real-world chart examples. The goal of this learning journey is to present concepts in the simplest possible language so that implementation becomes easier after understanding.
My belief is that learning technical analysis is relatively easy, but implementing it consistently is the most challenging part. This is where trader psychology and trading bias have the greatest influence. Therefore, the method we will discuss today is intentionally kept simple and practical. The simpler and more neutral the approach, the more effective it becomes in real trading conditions.
Today we will focus on three key concepts:
1. Market Structure and Liquidity
2. VWAP (Volume Weighted Average Price) and its types
3. How these two concepts combine to form a unified trading theory
However, before understanding these concepts, it is essential to understand their origi and foundational meaning. First, we must understand where market structure and liquidity originate from and what they truly represent. VWAP will be discussed in detail at a later stage.
Market structure is simply how price forms highs and lows.
- Higher highs + higher lows → buyers are in control→ Uptrend
- Equal highs + equal lows → liquidity is building→ Range
- Lower highs + lower lows → sellers are in control→ Downtrend
Market structure and liquidity do not simply mean that highs and lows are forming on a chart. In simple terms, they refer to converting chart structure into market sentiment and reading the chart the way one reads a book. A chart is no longer just a collection of lines and candles; instead, it becomes a narrative that reflects what major market participants are thinking and doing.
This is where institutions—commonly referred to as Smart Money—play a critical role.
Institutions include banks, hedge funds, mutual funds, and proprietary trading desks. These participants possess enough capital to influence both the direction and the momentum of the market.
Institutions never enter the market without planning, nor can they execute large orders without sufficient liquidity. Therefore, understanding market structure and liquidity essentially means learning to read institutional footprints.
Smart Money Concept (SMC)
This perspective forms the foundation of the Smart Money Concept (SMC). Through SMC, traders attempt to understand where market sentiment is shifting, where accumulation is taking place, where distribution begins, and where trend continuation or reversal is likely to occur. This process-based theory is applicable across long-term, short-term, and intraday trading.
From SMC, another refined approach has emerged known as Inner Circle Trading (ICT). ICT focuses on identifying liquidity and aligning execution strategies with market structure. Although the methods may differ in presentation, the core principle remains the same: understanding institutional behaviour and aligning with it.
By this point, it should be clear that market structure and liquidity are not standalone indicators. Instead, they form a conceptual foundation upon which frameworks like SMC and ICT are built. In the following sections, we will explore how market structure develops, what its key elements are, and how they can be identified on charts—so that theory moves beyond textbooks and becomes part of real trading decisions.
Learnings:
STEP 1: MARKET STRUCTURE — “THE MARKET SKELETON”
Understanding market structure is the first and most fundamental step in SMC and liquidity-based analysis. Until the structure is clear, concepts such as liquidity, order blocks, and fair value gaps remain incomplete. Market structure reveals the intent behind price movement—where price wants to go and why it is moving in a particular manner.
In simple terms, market structure involves reading the pattern of highs and lows formed by price. A sequence of higher highs and higher lows indicates buyer dominance, while lower lows and lower highs reflect seller control. When price moves repeatedly within the same range, it is not directionless; more often, it is accumulating liquidity.
There are two critical events within market structure. The first is the Break of Structure (BOS), which indicates trend continuation. The second is the Change of Character (CHoCH), which marks the first sign that price behaviour is shifting. CHoCH does not guarantee a full reversal but serves as an early warning.
CHOCH (Change of Character)
- First sign that the current trend is losing control and behavior is shifting.
- Acts as an early warning, not a confirmation of reversal.
BOS (Break of Structure)
-
Confirms trend continuation or a new trend after structure is broken.
- Acts as confirmation, showing which side (buyers or sellers) is in control.
Price transitions step-by-step from bearish to bullish as selling pressure weakens, structure fails, and buyers gradually take control. CHOCH marks the first structural failure (warning), while BOS confirms the new trend once higher highs and higher lows are established.
(LL → LH → LL → CHOCH → HL → HH → BOS)
Liquidity, sweeps, order blocks, and fair value gaps are all linked directly to structure. Therefore, understanding market structure means understanding the language of the market. Once this language becomes clear, charts stop being random candles and start forming a readable story.
STEP 2: LIQUIDITY — “THE FUEL THAT MOVES THE MARKET”
After market structure, liquidity becomes the most critical concept. If market structure is the skeleton, liquidity is the fuel that gives it life. Without liquidity, markets cannot move, and institutions cannot execute large positions.
Liquidity simply refers to areas where orders exist—especially stop-loss orders placed by retail traders. Markets are naturally attracted to these areas because they provide the volume required for institutional execution.
- Sell-side liquidity
- Buy-side liquidity
On charts, liquidity is commonly found above equal highs (buy-side liquidity) and below equal lows (sell-side liquidity). Obvious swing highs and lows also act as liquidity pools. These are not random levels; they are areas clearly visible to most traders.
An important point to understand is that the market targets liquidity—it does not follow it. When price moves toward an obvious high or low, it is often not attempting a breakout but instead seeking liquidity. Only after liquidity is collected does the market reveal its true direction.
Liquidity sweeps are frequently misunderstood as false breakouts or market manipulation. In reality, they are deliberate clean-up operations designed to remove existing orders from the market.
A liquidity sweep occurs when price intentionally moves slightly above an obvious high or below an obvious low. This triggers retail stop-losses and breakout entries, providing institutions with the liquidity needed to execute large orders.
Liquidity sweeps are typically brief. Price moves just far enough to collect liquidity and then quickly shows rejection. This rejection signals that the clean-up is complete and the market is ready to move in its true direction.
Experienced traders wait for confirmation after a sweep rather than reacting to the sweep itself.
STEP 3: ORDER BLOCK (OB) — “THE INSTITUTIONAL FOOTPRINT”
An order block is not a random candle. It is the last opposing candle before a strong impulsive move that results in a clear structure break. This candle represents the area where institutions initiated or built their positions.
- A bullish order block forms when the last bearish candle precedes a strong bullish move.
- A bearish order block forms when the last bullish candle precedes a strong bearish move.
These zones are significant because large orders cannot be executed instantly and often require price to return for completion.
Not every opposing candle is an order block. Only candles followed by strong displacement and structure break qualify.
STEP 4: FAIR VALUE GAP (FVG) — “PROOF OF SPEED”
A Fair Value Gap forms when price moves so rapidly that balanced trading cannot occur at intermediate levels. This creates an imbalance, known as a fair value gap.
On charts, an FVG typically appears as a three-candle structure where the middle candle is strong and impulsive, leaving an untraded price area between the first and third candles. Markets often revisit these imbalanced areas to restore efficiency, especially when FVGs form during impulsive structural moves supported by liquidity sweeps.
STEP 5: PREMIUM & DISCOUNT ZONES — “THE LOGIC OF VALUE”
Markets respond not only to direction but also to value. Premium and discount zones define where price is expensive or cheap relative to equilibrium.
By identifying recent highs and lows, the midpoint (50%) serves as equilibrium. Areas below this level represent discount, while areas above represent premium. Institutions prefer buying in discount and selling in premium. These zones must always be used in conjunction with structure and liquidity, not in isolation.
VWAP: The Institutional Benchmark of Value and Execution
Introduction
VWAP (Volume Weighted Average Price) is not just an indicator—it is a measure of fair value used by institutions to assess execution quality and market positioning within a trading session . By weighting price with volume, VWAP reveals where real participation has occurred and whether the market is trading at a premium, discount, or equilibrium. When combined with market structure and liquidity, VWAP becomes a powerful–contextual tool, helping traders understand where price should react , when moves are efficient or inefficient , and how institutional intent unfolds during the session .
How to Understand VWAP
VWAP Is a Value Line, Not a Signal
VWAP represents the session’s fair price based on real volume participation.
It does not predict direction; it tells you whether price is trading at value, premium, or discount.
Above VWAP → Market is in premium; buyers are paying higher prices
Below VWAP → Market is in discount; sellers are accepting lower prices
Use this to judge efficiency, not entries.
Always Read VWAP in Session Context
VWAP resets every session because liquidity and intent reset daily.
Only today’s VWAP reflects today’s institutional activity—ignore past VWAP memory.
VWAP Slope Shows Market Acceptance
Rising VWAP → Value is increasing; buyers dominate
Falling VWAP → Value is decreasing; sellers dominate
Flat VWAP → Balance or range environment
VWAP Works Best with Structure
VWAP alone is incomplete. Combine it with:
BOS → confirms acceptance of value
CHOCH → warns of rejection of value
VWAP–Liquidity–Market Structure Trading Method
This trading method is built on the understanding that markets do not move randomly; they move in response to liquidity, value, and structural control. VWAP represents the session’s fair value and acts as the institutional benchmark for execution. Market structure, defined through Break of Structure (BOS) and Change of Character (CHOCH), reveals which side is in control, while liquidity sweeps expose true intent. Trades are taken only when these three elements align.
Watch Liquidity Around VWAP
Sweeps above or below VWAP often:
Trigger retail stops
Create liquidity
Lead to sharp reactions
Price often moves away from VWAP after liquidity is taken, not before.
Price must first take liquidity from obvious areas such as equal highs, recent swing highs, or session highs.
In a bearish scenario, price typically sweeps buy-side liquidity above recent highs or above VWAP, triggering buy-side stop-losses and breakout entries.
This liquidity grab provides the necessary volume for institutional distribution, after which price shows rejection and shifts bearish.
Without a clear buy-side liquidity sweep, no bearish trade setup is valid.
After liquidity is taken, the next element to observe is the Change of Character. CHOCH occurs when price breaks a minor structural level against the prior trend, signalling that the existing control is weakening. A bullish CHOCH forms when price breaks a lower high after a sell-side sweep, while a bearish CHOCH forms when price breaks a higher low after a buy-side sweep. CHOCH is treated strictly as an early warning and never as a trade entry.
Confirmation comes through Break of Structure. A bullish BOS occurs when price reclaims VWAP and breaks a previous swing high, establishing higher highs and higher lows. A bearish BOS occurs when price loses VWAP and breaks a previous swing low, confirming lower lows and lower highs. BOS confirms that the market has accepted value in a new direction and that control has shifted.
Once BOS is established, execution is planned on a pullback rather than through chasing price. In bullish conditions, price often retraces toward VWAP, a demand zone, or a prior structural level before continuing higher. In bearish conditions, price pulls back toward VWAP, supply, or previous structure before moving lower. Entries are taken only after this retracement, with risk defined beyond the liquidity sweep or structural invalidation point.
Risk management in this method is structural rather than arbitrary. Stop-loss placement is always positioned beyond the liquidity sweep or beyond the level that invalidates the structural narrative. Profit targets are not fixed numbers but liquidity objectives such as opposite equal highs or lows, session extremes, or visible liquidity pools.
This method intentionally avoids trading without context. When VWAP is flat, structure is unclear, or liquidity has not been taken, no trades are executed. The objective is not frequency but precision. By waiting for liquidity to be taken, value to be tested, and structure to confirm, the trader aligns with institutional behaviour rather than retail reaction.
In essence, this framework treats VWAP as the measure of value, liquidity as the fuel for movement, and market structure as confirmation of direction. When these elements are read together, the market reveals its intent clearly, allowing trades to be executed with logic, patience, and consistency.