What Is an Order Block in Forex Trading? All you need to know about Types of Order Blocks

Dive into the world of Forex trading with our insightful guide on order blocks. Uncover the strategies of institutional traders and learn how to identify and leverage these powerful market structures for your trading success.

Ever wondered where big money moves the forex market? Imagine the Forex market as a vast ocean, and the large institutional traders as the mighty whales whose movements can create waves felt across the entire expanse. These whales are strategic and deliberate, and when they move, they leave behind a trail known as Order Blocks.

One of the trading strategies of Smart Money is Order Blocks, which play a significant role in the financial markets world, and learning them can improve your profit potential. Generally, order blocks are orders to buy or sell currencies or other assets in large volumes. In this article, we will discuss order blocks, review their types, and how to trade and manage the risk associated with them. Stay tuned.

Contents

What is an Order Block?

In the intricate tapestry of Forex trading, order blocks stand out as the bold patterns woven by the market’s most influential players. But what exactly is an order block? It’s a term that might sound complex, but its concept is rooted in the basic principles of supply and demand.

An order block is a cluster of orders, typically originating from major financial institutions or savvy traders, positioned at a certain price level. These are not random placements; they are strategic, calculated moves designed to enter or exit the market with significant volume without causing drastic price fluctuations. Imagine a game of chess where each piece is moved with precision and purpose; that’s how institutional traders place their order blocks.

Why are they so significant? Because they can act as magnets for price action. A well-placed order block can attract the price back to its level, as it represents a point of interest where big players have previously shown their hand. For the individual trader, spotting these blocks is akin to reading the market’s pulse, providing insights into where the price might head next.

Why are Order Blocks in Forex Important?

The importance of order blocks in Forex trading is akin to understanding the currents beneath the waves in the ocean. They are the invisible forces that can propel you forward or pull you under. Here’s why they are crucial:

1. Blueprints of Market Intentions: Order blocks are like the blueprints that reveal the intentions of the market’s most influential players. They show where big money has been placed, providing clues to future market movements.

2. Price Movement Catalysts: These blocks often act as catalysts for significant price movements. Identifying an order block can give traders a heads-up on potential surges or drops in price, allowing them to position themselves advantageously.

3. Risk Management Tools: By understanding where order blocks are situated, traders can set more informed stop-loss orders and take-profit points, enhancing their risk management strategies.

4. Market Structure Markers: Order blocks help define the market structure. They can indicate key support and resistance levels, which are essential for technical analysis and making educated trading decisions.

5. Psychological Indicators: They also serve as psychological indicators. Knowing that an order block represents a concentration of trades by large institutions can influence trader sentiment and, consequently, the market’s direction.

6. Liquidity Pools: Order blocks often represent liquidity pools. For traders looking to execute large orders, these blocks can provide the necessary liquidity to enter or exit positions without causing slippage.

Understanding the importance of order blocks is not just about recognizing patterns; it’s about gaining insight into the underlying mechanics of the market. It’s about seeing the forest for the trees, the ebb and flow of the market’s tides, and using this knowledge to navigate the Forex market with a keener eye and a steadier hand.

How to Identify Order Blocks?

Identifying order blocks is like uncovering hidden gems in the vast landscape of the Forex market. It’s a skill that can significantly enhance your trading strategy. Here’s a step-by-step guide to help you spot these pivotal areas:

1. Study Historical Price Charts: Begin by examining historical price charts. Look for areas where the price has made a strong move away from a certain level. These are potential order block zones.

2. Observe Consolidation Phases: Pay attention to consolidation phases before a significant price movement. The consolidation phase often precedes the formation of an order block.

3. Identify Institutional Footprints: Large institutions leave footprints in the form of price levels where substantial volumes have been traded. These levels can often be identified by looking at volume indicators or price level tools.

4. Look for Rejection Wicks: Candlestick charts can reveal order blocks through rejection wicks. These are the tails or shadows of candlesticks where price has tested a level and then sharply reversed.

5. Use Technical Indicators: Incorporate technical indicators such as Fibonacci retracement levels, pivot points, and moving averages to pinpoint potential order block areas.

6. Check Timeframes: Analyze multiple timeframes. Order blocks may be more evident on higher timeframes such as the 4-hour or daily charts.

7. Confirm with Price Action: Once you’ve identified a potential order block, watch for price action to confirm it. If the price respects the level by bouncing off or breaking through with significant volume, it’s likely an active order block.

8. Refine with Support and Resistance: Refine your identification by correlating order blocks with known support and resistance levels. They often align, reinforcing the significance of the block.

Read More: What is a trending or ranging market?

Types of Order Blocks

There are different units of order blocks, but the most important ones are:

• Bullish order block
• Bearish order block
• Breaker Block
• Rejection Block
• Vacuum Block

Further, we will discuss all these topics.

Bullish Order Block: A bullish order block is formed near support and is known as the last bearish candle before the price makes a significant and aggressive ascent move. At this key level, big traders have placed buy orders. As you can see in the picture below, the order block range has been determined, and the price has returned with good momentum after hitting that range.

Bearish Order Block: A bearish order block is formed near resistances and is known as the last bullish candle before the price makes a significant and aggressive descent move. At this key level, big traders have placed significant sell orders. You can see an example of a bearish order block in the image below, which has good validity due to the strong initial movement.

Breaker Block: When we reach strong support in a downtrend, and the price rises and breaks its last ceiling (W pattern), in this case, the area of the breaker block is the ceiling and floor of the candle that caused the last ceiling to break. The color of this candle is in line with the new trend.

All of the above applies to the M pattern and the uptrend too. In a way, when we reach a strong resistance in an uptrend and the price returns and breaks its last floor, in this case, the breaker block area is the ceiling and the floor of the candle that caused the last floor to break. The color of this candle is in line with the new trend. In the image below, you can see an example of a breaker block.

Rejection Block: when we have one or more candles with a long shadow on important ceilings or floors, the price tends to skip the body of these candles and reach the shadows. Usually, this encounter with shadows is accompanied by good momentum. These boundaries created by shadows are called Rejection blocks. Note that the direction of rejection candles is not crucial, and these candles can be ascending or descending.

Vacuum Block: If a piece of news causes a gap, it means in the gap range, which is known as a vacuum block, no trade has been made, and when the price returns to this range, we will probably see a strong reverse reaction.

How to Trade with Order Blocks

Trading with order blocks is like harnessing the gravitational pull of the market’s most massive bodies—the institutional traders. To effectively trade with these blocks, one must understand their influence on price action and how to make strategic decisions based on their presence. Here’s a comprehensive guide to trading with order blocks:

1. Identify Potential Order Blocks: Use the methods discussed earlier to locate potential order blocks on your charts. Remember, these are areas where significant market moves have originated.

2. Wait for Price Action Confirmation: Once you’ve identified an order block, wait for price action to confirm its influence. Look for signs like a bounce off the block or a breakthrough with increased volume.

3. Set Entry Points: If the price action confirms the order block’s significance, set your entry point near the block. For bullish blocks, consider buying when the price approaches the block from above. For bearish blocks, consider selling when the price approaches from below.

4. Determine Stop-Loss Levels: Place your stop-loss just outside the order block. This minimizes potential losses if the market doesn’t react to the order block as expected.

5. Plan Your Exit Strategy: Set take-profit levels at the next significant order block in the direction of your trade. This could be a previous high or low, or another order block identified on the chart.

6. Monitor Market Context: Always consider the broader market context when trading with order blocks. News events, economic data releases, and other market conditions can influence how the market interacts with these blocks.

7. Manage Risk: Never risk more than a small percentage of your trading capital on any single trade. Even the most well-identified order blocks can fail to influence the market as expected.

8. Refine with Experience: As you gain experience, refine your identification of order blocks and your trading strategy around them. Learn from both successful and unsuccessful trades to improve your approach.

By following these steps, traders can leverage the power of order blocks to make more informed and potentially profitable trading decisions. It’s a method that requires patience, discipline, and a keen eye for market behavior, but for those who master it, trading with order blocks can be a game-changer.

Conclusion

Like any trading strategy, order blocks are not a surefire and 100% profitable trading method. You should practice and test this method in a demo account before trading with it.

And the last piece of advice,

Never enter the financial markets with money that if you lose it, your general life routine might be affected.