All you need to know about Order Block types
Intro
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?
Order blocks are specific price areas where large market participants have already placed significant buy or sell orders, and the existence of large order quantities in a range will influence the price movement in a specific direction. Generally, order blocks are a special and advanced type of support and resistance levels used as entry or exit points for trades. Therefore, order blocks can provide helpful insight into the behavior of big traders and key market levels.
How to identify the order blocks
We can identify the order blocks in any timeframe. In technical analysis , the trading timeframe choice depends on your trading style. If you intend to trade short-term or daily, use small time frames like five or fifteen minutes. Otherwise, use larger time frames such as 4-hour (H4) or daily (D1) for long-term trading. After choosing the correct time frame, you should check and identify the market trend. That is the most vital part of your trading. At this point, look for areas where the price has reacted significantly, such as:
- Severe reverse reactions
- Long fixations
- Strong breakouts
To mark the order block levels, we specify the highest and lowest price of the last candle that was closed against the price's sharp movement direction. These levels represent areas where institutional traders may have placed large orders.
At first, it may be a little challenging for you to identify the correct order blocks. Another way to find the order blocks is to use an indicator. To do this, first log into the "TradingView platform." In the Indicators section, search for "Order Block Finder." There are several indicators that you can use, click on the desired option, and the desired indicator will be added to your chart. These indicators identify order blocks in different timeframes, and you can use them to plan important areas.
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.
Order Block validity
When the price starts moving and initial jumps from the order block range, this movement should be accompanied by good momentum and must be 2 or 3 times the size of the order block candle.
The key and practical tips on how to use order blocks:
- Order blocks act as support and resistance levels.
- The more times the price returns to the same level, the weaker the order block becomes. We recommend using each order block only once.
- When the price crosses the order block level, its role of support or resistance is reversed. In such cases, traders wait for a retest of the broken level before entering trades in the breakout direction.
- Some traders use multi-timeframe analysis or place their trading orders in the middle of the order block range for optimal entry.
- For more success in trading with order blocks, it is better to use fundamental analysis.
How to trade with order blocks
Below is a step-by-step guide to trading with order blocks:
1. Define the trend.
The first and most important step in trading is determining the trend and market structure . First, determine what the market trend is. Bullish, bearish, or ranging! Only trade in the trend direction. For example, if you are in an uptrend, only use order blocks that play a supporting role. For example, in the image below, we see a bearish trend in the daily timeframe of the USDCAD currency pair. The price is recording lower floors and ceilings.
2. Identify the order blocks
In this step, you need to identify the order blocks. Based on the points mentioned, mark the important areas. In this example, we only need to find order blocks that play a resistance role. As you can see, we have marked the important areas below.
3. Entering the position
You can use two methods to enter the trade. In the first method, after the price hits the desired area, we wait for the creation of a return candle, such as a hammer or pin bar, and enter the position in the trend direction. In the second method, which is a bit more aggressive, we open the position by placing a pending order. The advantage of the second method is that we enter the trade at a better price, and the probability of being left out of the transaction is minimized, but it is more risky. Here, we have entered into a transaction based on the first method.
4. Place the take-profit and stop-loss.
Place a stop loss order slightly away from the order block to control the risk of loss due to sudden price changes. To determine the take-profit, use the next support and resistance levels or determine the appropriate price based on the risk-to-reward ratio of your trading system.
5. Manage risk.
The order blocks may not always work correctly. Always enter a trade complying with risk management and the appropriate volume, and never risk more than 2% of your total capital in each trade.
Summary
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.
