If you're a forex trader, you've likely heard whispers of the elusive "order block."
Order blocks are a specialized type of supply and demand zone that form when banks execute large trades using block orders. These zones often signal high-probability reversal points, making them invaluable tools for traders.
But what exactly are "Order Block", and how can you leverage them to boost your profits?
Get ready to dive deep into the world of order blocks.
We'll uncover their unique characteristics, teach you how to spot them on your charts, and reveal the most effective entry strategies to maximize your success.
Order blocks may be gaining traction in recent years, but most traders I speak with remain in the dark about their true power.
Let's clear things up:
Order blocks are distinct zones on a price chart where banks have entered significant positions using block orders. These zones often signal high-probability reversal points, making them invaluable tools for traders.n
But Aren't They Just Like Supply and Demand Zones?
Not quite.
While order blocks share similarities with supply and demand zones, they form under unique circumstances and operate on different mechanics. Their true power lies in understanding the specific actions of banks within the market.
Why Do Order Blocks Form? It's All About the Banks
Order blocks arise when banks need to enter a massive trading position but lack sufficient opposing buyers or sellers. Executing such a large order in one go would cause a major price disruption.
Their solution?
Divide and conquer.
Banks use block orders to slice a massive trading position into smaller, more manageable chunks. Smaller orders are executed at similar prices, allowing banks to stealthily enter the market without causing undue volatility.
See the tight consolidation where the highs and lows are practically kissing? That's your order block in action!
Here's what's happening behind the scenes:
The block order has sliced the bank's massive position into smaller chunks, executing them at similar prices. This creates a consolidation zone with tightly clustered highs and lows – the spot we'll be watching for potential trade entries when price returns. When price revisits this order block, it's often a signal that the banks are ready to resume their activity, potentially driving the price in their desired direction.
So, keep your eyes peeled for these tight consolidations – they're your gateway to profitable order block trades!
Identifying and drawing order blocks might seem tricky at first, but with a bit of practice, you'll be spotting them like a pro.
I'm here to make it even easier for you.
Let's break down the process step-by-step, so you can confidently incorporate order blocks into your trading arsenal.
Bullish Order Block Zone
Bullish order blocks form when the banks use a block order to split up a large, long position. These act as support and denote points where price has a high probability of moving higher.
Here’s how they look…
Notice that tight range consolidation?
That's your hallmark of an order block.
ALL order blocks share this distinct swing structure: The highs (or lows in bullish blocks) cluster tightly together, creating a compressed zone of price action.
Now, let's dive into bearish order blocks...
Bearish Order Block Zones:
Bearish order blocks emerge when banks break up a massive short position using a block order. These zones are potential turning points where the price could dramatically reverse to the downside.
Again, it’s the same structure!
Multiple highs/lows develop within a tight range, forming a narrow segment of price action. That tell us a bullish order block must exist here.
Not so hard after all, eh?
Order blocks are formed using many of the same principles as standard supply and demand zones, but with one crucial distinction:
Always include the entire consolidation.
Unlike regular zones, where we focus on specific highs or lows, with order blocks, we can't be certain exactly where banks entered all their positions. Therefore, it's essential to encompass the entire consolidation area – from the highest point to the lowest point of the block.
This ensures we cover any potential price levels where the banks might re-enter the market when price revisits the zone.
Let's illustrate this with a quick example:
To mark the order block…
Draw a zone from the lowest swing low in the consolidation up to the highest high. The zone should cover the entire consolidation. Any hidden points the banks entered positions will now be included in the zone.
For bullish order blocks, follow the same process but in reverse…
Place a rectangle on the highest high in the consolidation, then drag down to the lowest lows, just like I have in the image.
Together, that’ll cover the right area for the zone.
Simple!
Trading order blocks boils down to this: wait for a confirming price pattern within the zone to signal the banks' intent for a reversal, then enter your trade.
For me, the most reliable patterns are:
Pin bars/hammer candlesticks: These classic reversal signals show a strong rejection of one side of the market.
Engulfing patterns: When a large candle completely engulfs the previous candle, it indicates a powerful shift in momentum.
Both patterns often signal institutional activity, so seeing them inside an order block is a strong indication that the big players are ready for a price reversal. While other patterns can work, these two consistently deliver the highest probability of success.
Let's illustrate with a quick trade example:
Above, we see a bullish order block on Gbp/Usd.
To trade the order block, wait for either a bearish pin bar or engulfing pattern to form somewhere inside the zone to confirm the banks interest.
Key Point: For a valid entry signal to appear, make sure the pattern or candlestick touches the zone.
If the pattern fails to reach the zone or move inside, DO NOT enter a trade. Price is encountering pressure from the other side, but not enough to indicate a reversal. More confirmation is needed!
In our example, a bearish engulfing pattern forms…
The bearish engulf CONFIRMS the banks are selling inside the zone and potentially loading up further short positions for a reversal.
So, what do we do?
Load up our own trade, of course!
We enter short to piggyback onto the reversal.
For the stop loss, place the stop ABOVE the order block zone. That’ll cover our asses in case price reverses and moves higher – still a possibility, even with the engulf.
For bullish order blocks, always place the stop BELOW the zone.
Here’s how our trade played out…
Success!
We caught the reversal.
The bearish engulf signalled the beginning of a large bearish move out the order block, confirming the banks were loading up more shorts and wanted price to reverse.
Now we can manage our trade and take profits as price rises.
Easy, right?
Before we wrap up, here are a couple of key points to remember when using order blocks in your trading:
#1 Order Blocks Are NOT A Standalone Trading Strategy
Many traders mistakenly believe that order blocks alone can serve as a daily trading strategy, similar to support and resistance or price action patterns.
This couldn't be further from the truth.
Order blocks make a terrible core strategy because of their infrequent occurrence. They form when banks use block orders to enter large positions, which doesn't happen often. Usually, enough orders exist for banks to enter the market without needing block orders.
The Solution: Use order blocks as a high-probability setup alongside your core trading strategy. Combine their infrequent but powerful signals with a strategy that provides daily signals, like support and resistance levels. This way, you get both quantity and quality in your trading opportunities.
#2: Price May Breach the Order Block Before Reversing
It's common for price to enter the order block before reversing, but sometimes, a few candles will push beyond the zone first. This is known as a stop run.
Stop runs allow banks to enter more positions at favorable prices. For example, by driving the price below an order block, banks can trigger stop-loss orders and use them to enter more short positions at a better price.
Here's a visual representation of a stop run:
My Advice: Never exit a position immediately when the price breaches a zone. It could be a stop run! Wait to see if the price moves back inside the zone and look for reversal signals. Stop runs usually involve sharp movements, so expect a large candle to form after the zone is breached.
Let's explore this concept further with a specific example...
See how price peaked below the order block before reversing?
That’s the banks executing the stops to enter more sell positions.
Just Think: Where did the shorts place their stops during the prior decline? Above the most recent swing high – that’s what all the books say, right? In this case, the order block created the most recent swing high; that’s where the stops are!
Of course, the bank can see these stops.
SO: They decide to push price into the sitting stops to execute more sell positions. On our charts, this creates a small spike above the order block zone before price reverses.
Now…
Stop runs aren’t common with order blocks, but they can and do happen.
My Advice: Never exit a position immediately after price peaks above or below a zone – it’s probably a stop run! See if price moves back inside, then wait for signs of a reversal. Stop runs usually result in sharp moves, so a large candle should form after price breaches the zone.
Just something to keep in mind, that’s all.
Summary
To sum up, then…
Order blocks are an excellent high probability addition to any trading arsenal. It’s become one of my favourite setups over the years and has served me very well. Just remember – order blocks are not suitable as a single trading strategy.
Always use them in conjunction with another strategy.
For me, I use supply and demand zones – that’s my core strategy.
However, support and resistance levels, pin bars & engulfing candles, and most other common strategies all perform well with order blocks, too.