There is a powerful strategy that professional traders have been quietly using but the retail traders fail to consider. The strategy usually entails monitoring the actions of banks and institutional traders that transfer billions of dollars in the forex market on a daily basis. The trick is to learn about order blocks in forex trading.
Whereas 90 percent of retail traders concentrate on old conventional indicators, at least smart money ideas such as order blocks show where the actual market makers Emily their huge trades. They are not arbitrary price levels. They are strategic areas in which the institutional players have placed their imprints in the market.
Order blocks in forex trading-What are they?
Order blocks are distinct price regions where big players in the market have left huge buy or sell orders. You can imagine them as the crumbs that institutional traders have left behind. These areas reveal precise positions where banks and hedge funds have built large positions prior to executing large market moves.
Order blocks provide accurate entry points unlike the inaccurate traditional support and resistance levels; this is because order blocks are based on real institutional activity. They occur when large institutions place large orders to avoid moving market prices when establishing their positions by dividing the orders into smaller pieces.
There are two broad types:
Bullish Order Blocks:
The final bear candle which forms the lowest low prior to a big bull run. This is where the institutional buyers have come in.
Bearish Order Blocks:
The final bullish candle which forms the upper most high prior to a significant decline. This reveals where the institutional sellers have dominated.
The Reason Order Blocks Are So Effective
The foreign exchange market turns over about 6.6 trillion every day. This volume is controlled by the banks and institutions. When such players have to enter or exit huge positions, they cannot just put a single huge order without pushing prices against themselves.
They instead fracture their orders into smaller blocks. These blocks cause supply and demand imbalances which ultimately lead to steep price action. Intelligent retail traders will be able to define these areas and then trade with the institutional money instead of fighting it.
Order blocks are effective because they exploit the basic market mechanics. They show levels where actual money has been invested, not merely technical levels that are traced on charts.
The Identification of Quality Order Blocks
To identify order blocks one needs to know the market structure and institutional behavior. This is how the professionals do it step by step:
Step 1: Seek Material price changes
Look for jagged decisive action on your charts. These impulse moves can come after a consolidation phase in which institutions have been accumulating.
Look at breakouts or break downs of old highs or lows with good momentum. The breakouts are usually a sign of institutional participation as opposed to retail-driven price behavior.
Step 2: Locate the Origin Zone
After identifying a meaningful movement, go back and identify the candle that occurred just before the breakout. This candle is the final orders institutions made before the move was initiated.
In case of bullish configurations, find the final bearish candle prior to a breakout to the upside. In the case of bearish setup identify the final bullish candle before the decline.
Step 3: highlight your order block
Trace a rectangle around the located candle, but continue to the right. This forms your order block area. Your upper and lower limits are the high and low of this candle.
Step 4: verify with Market Structure
Powerful order blocks conform to general market structure. When in an uptrend, then look at bullish order blocks. During down trends, give preference to bearish blocks.
Seek further confirmation in break of structure (BOS) or change of character (CHoCH) patterns. These organisational changes substantiate the existence of institutional action.
The Entire Order Block Trading Strategy
Timeframe Selection
The order blocks on the higher timeframes are considered heavier than the order blocks on the lower timeframes. The most accurate signals are found on daily and 4-hour charts, whereas the 15-minute or 1-hour charts offer accurate entry time.
Begin your analysis on daily charts to locate large order blocks then move to smaller timeframes to get entry signals.
Buy Order Blocks Entry Strategy
Wait until price has traveled outside the bullish order block leaving what traders term a “liquidity void”. Once price comes to test this zone, consider getting confirmation signals before entering.
Good evidence is:
- The rejects wick at the order block level
- Bullish engulfing candle sticks
- Technical price patterns of buying interest.
Put your entry in the order block area, which is usually in the mid-range of the move to manage risks better.
Order Blocks Bearish -Entry Strategy
The same rules can be applied to bearish setups. Allow price to ramp out of the bearish order block and then come back to test.
Watch for:
- Refusal on the outer edge of the block
- Bearish reversal formations
- Volume affirmation of selling pressure.
Where to Place Stop Loss
On the bullish trades, stops can be placed below the low of the order block. This honours the institutional logic as banks would not allow price to trade substantially below their accumulation zone.
When taking bearish trades, place stops above the order block high with a small volatility cushion. This strategy is consistent with institutional risk management.
Take Profit Targets
Bullish trades should target past swing highs and bearish trades should target past swing lows. Professional traders will frequently take risk-reward ratios of at least 1:2, yet order blocks can present significantly higher rewards.
Think about scaling out on many levels:
- Initial target 1:2 risk-reward
- Second objective at past structural levels
- Long-term analysis target final
Case Studies and Examples in the Real World
example of EUR/USD Bullish Order Block.
On significant ECB announcements, EUR/USD often shows order blocks that can be found in the textbooks. Institutional buyers came in at these levels when the two made a bullish order block in the correction of a uptrend.
The ensuing retest offered low risk entry points with good risk reward ratios, usually around 3:1 and more.
Bearish Order Block gold (XAU/USD)
Gold markets exhibit one of the most visible order block patterns owing to high participation by institutions. The recent instance was when gold created a bearish order block at the psychological resistance area just before a steep drop.
When price retested this institutional selling zone, traders who IF identified this area grabbed huge profits.
One Day Order Block Methods
Together with BOS and CHoCH
Break of Structure (BOS) and Change of Character (CHoCH) patterns offer dramatic confluence with order blocks. The combination results in high-probability set-ups, which lie in institutional flow.
Multiple Timeframe Analysis
The professional traders will look at the order blocks on a variety of time frames at the same time. An order block daily + 4hr confirmation signals ensure outstanding quality of trades.
Begin with weekly analysis to get the direction of the trend, daily analysis to identify key order blocks and 4-hour chart analysis to determine accurate entries.
Pitfalls to toetagStyles
Consolidation with a Marking
Not all sideways movements make a viable order block. identify clean breakouts with good momentum as opposed to small range breaks.
Then there is the symptom of Ignoring Confirmation Signals.
Trades that are entered without confirmation will see the failure rates go up. Always take confirmation of price action at order block levels.
Trading With Lower Timeframes Only
Order blocks on 1 or 5 minute charts are seldom important. The signals of higher timeframes are way more powerful and actually respected by institutions.
combating Market Structure
Order blocks which are against the overall market structure often fail. It is best to make your trades coincide with the main trend.
Order Block Trading Risk Management
When trading order blocks position sizing becomes critical. Because the setups provide accurate entry points, you will be able to employ closer stops and greater position sizes with identical dollar risk.
Determine position size using the entry to stop loss distance. It is a way to have the highest profit potential and manageable risk.
It is also important to never risk more than 1-2 percent of your account on any single trade, no matter how much you may be convinced of a setup.
Order Block Analysis- Tools and Resources
Order block indicators and drawing tools have become common on many trading platforms. Manual identification can give better results though because it causes you to learn market structure.
Look at platforms with multi timeframe analysis and clean charting. The capability to store and restore blocked marked orders on different sessions is simply priceless to swing trading strategies.
Conclusion: The Order Blocks: Consistency in Profits
Order blocks are amongst the surest methods of trading with institutional money in the forex markets. Knowing where the banks and hedge funds are putting their orders, retail traders are able to put themselves in a high-probability set up with great risk-reward ratios.
To achieve success, one has to be patient, have good identification skills and also have discipline in execution. It is advisable to begin with larger time frames and the most popular currency pairs and then proceed to more advanced configurations.
It is better to remember that consistency is more important than perfection in trading. Put an emphasis on finding quality order blocks as opposed to attempting to trade every potential set up. The institutions that you are tracing their footprints did not develop their success by making hasty decisions and neither should you.
