Order Blocks: What to Know and How to Trade It
The concept of order blocks was first popularized by professional traders in the 2000s.
Today, order block trading is a widely used technique among both professional and retail traders. It is seen as a reliable way to identify areas of high liquidity and order concentration, which can lead to profitable trading opportunities.
What are Order Blocks in Trading?
Order blocks are areas of price concentration where large market participants have placed significant buy or sell orders.
Think of order blocks as the pivot point before an impulsive price move.
How Do Order Blocks Work?
When price reaches an order block, it can stall or reverse due to the large number of pending orders and the significant amount of liquidity.
How to Spot a Valid Order Block
To identify a order block, all three of the following requirements must be met.
1. Must Create a Huge Fair Value Gap
The first requirement of a valid order block is when the the following 3 candlesticks create a big fair value gap.
2. Must Change Market Structure or CHoCH
The second requirement to a valid order block to trade off, is that it needs to make market structure changes or change of character (CHoCH).
3. Must be Unused
The third requirement for a valid order block to be tradable is it must be unused. The reason for this is because order blocks are not as strong as supply and demand created by institutions.
To get a higher success rate, untapped order blocks are best.
3 Steps to Trade Order Blocks
Once all the above requirements are met, and you see a clear direction in market trend, you can take a trade at a order block.
1. Place your Trade at the Beginning of an Order Block
The first step is to execute your trade as soon as price action taps on the beginning of an order block.
If you’re looking to get into longs, the top of the order block is the beginning. If you’re looking to get into shorts, the bottom of the order block is the beginning.
2. Place your Stop Loss at the End of an Order Block
If price action does not hold the order block than you’d set a stop loss once price action closes at the end of the order block.
If you’re looking to get into longs, the bottom of the order block is the end. If you’re looking to get into shorts, the top of the order block is the end.
3. Set Price Target
The price target will vary per trader. Some traders will take profit at 30% return and others will set them for swing highs. The price target will depend on you.
In Summary
Order blocks are price areas where impulsive buying or selling occurred. Order blocks are also based on behavior of traders, and short-term lived.
Ultimately, trades should not be based only on order blocks. Order blocks are best when combined with other techinical analysis strategies such as fair value gaps or supply and demand zones.
Frequently Asked Questions
Does a Break In a Order Block Mean A Reversal In Trend?
If a order block breaks it does not mean that there’s a reversal in trend. The best way to determine a reversal in trend is to if price action does a changes of character (CHoCH) in smaller timeframes.
Order Blocks vs Fair Value Gaps
Order blocks are is a price area where orders are waiting to be executed either to the buy side or sell side. Fair value gaps are gaps in price that are caused by a significant imbalance between buyers and sellers.
There is no comparison of which is better or worst, what you need to know is that fair value gaps are a result of an order block. You can use both order blocks and fair value gaps to find a trading opportunity.
