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Posted on September 27, 2024
In an order block, there are so many orders that not all of them get filled. Therefore, whenever the market returns to the order block, those pending orders get filled, leading to a strong reaction in the market.
Order block in the market is a price level where a lot of investors and traders place their buy and sell orders, which causes a sharp move in the market. Whenever an order block is triggered, it creates a fair value gap. An order block is also known as a supply and demand zone. Order block is very important for understanding the market’s direction.
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Whenever an order block is triggered, the market either moves up or down. If it is in the demand zone, it will be called a bullish order block. If it is in the supply zone, it will be a bearish order block. If you understand one, it will be easier to understand the other.
A bullish order block is formed in the demand zone and is the last bearish candlestick of a downtrend. The last bearish candlestick means that after this, the market shifts into an uptrend and moves sharply, creating a fair value gap, which confirms the formation of a bullish order block.
You will understand it better with the example from this image.
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A bearish order block is where many institutional sellers have placed their sell orders. This is always done in a supply zone. In this, the process is the same as buying, but here, selling takes place.
Also read: Fair Value gap (FVG): Trading Strategy, Best Timeframe, Indicator and Quick Tips
To identify an order block, look at the market’s historical movement and observe from which price level the market has moved sharply. Price action traders use this method to identify any order block. In any supply or demand zone, the last candlestick of the trend is marked to identify an order block.
Look at a consolidation chart, when a sudden move occurs, that can also be an order block. You can use a volume-checking indicator, which helps you keep an eye on the volume and get confirmation for the order block.
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For Order Block, you first need to find the market in a supply or demand zone, or the market should be in consolidation. After that, here are a few steps you can follow to trade in an order block.
The most important thing in order block trading is identifying the last opposite candlestick after which sudden moves occurred in the market.
Look at the market’s previous behavior: observe how the market moves when it returns to the same level after a sudden move. If the market is moving as you expect, then you can proceed with order block trading.
You can wait for a confirmation candlestick, such as a shooting star, hammer, engulfing, or evening star, to trade with the order block. According to the order block.
Also read: Smart Money Concept (SMC): Trading Strategies, Order Block, FVG, Breaker & more 2024
Whenever an order block fails, it converts into a breaker block. What happens here is that when the price reaches the order block, whether it’s bullish or bearish, instead of respecting the order block and reversing as expected, it breaks through the order block. This leads to the formation of a Breaker Block.
However, it’s not that every failed order block converts into a breaker block. For a breaker block to form, the order block must break while also creating a Fair Value Gap (FVG) as the price moves through it. Only then does a breaker block formation occur.
Simply click on the indicator section in TradingView, search for “order block,” and then use the various indicators available. Choose the one that seems most accurate to you. This will make it easier to find order blocks.
I personally use the “Order Block Detector” by LuxAlgo.
The order block trading strategy I use is as follows: First, I create a zone using the high and low of the first candlestick when the market opens.
You can do this on any time frame, but I use the 15-minute time frame because it creates a normal-sized zone. If I did the same on the 4-hour time frame, the zone would be much larger, and it would take much longer in order block trading.
After marking the zone on the 15-minute timeframe, you should shift to a smaller timeframe like 5 or 3 minutes.
Now, whichever side the market breaks and gives a closing, you need to plan your trade in that direction. Assume the market gives a closing on the upside, then you’ll plan a buying-side trade for that day.
When the market gives a closing on the upside, the first thing you need to do is find the last opposite candlestick at the bottom and mark it, as this will be your buying zone. Now, the market will return to that last opposite candlestick.
However, you need to watch if the market forms a double top on the 5-minute or 3-minute chart as it comes down. A double top should form at the top for this order block trading strategy to be valid.
After that, when the price reaches the last opposite candlestick, you need to look for a double bottom formation. If that forms, it will be your second confirmation. After that, when the price breaks out of the last opposite candlestick and taps it again during the retest, this will be your third confirmation.
After the double bottom is broken, the entry becomes valid, and you can take the entry using this order block trading strategy. In this strategy, you can set your target according to your preference, either 1:1 or up to 1:3.
The stop-loss will be placed below the double top. And if the price closes below the 15-minute candlestick, the trade will become invalid.
Order block SMC trading is a crucial part, and understanding it is just as important. In price action trading, institutional traders also use these methods. These methods apply across all markets, including indices, forex, and stocks.
In SMC, an order block is valid only when the market creates a Fair Value Gap (FVG) after the order block. Once an FVG is created, the price will react when it returns to that level.
The internet has many people offering order block screeners, which include charts where order block formations are identified. Chartink is also a website where you can use an order block screener. Additionally, on TradingView, there are indicators that can mark and identify order blocks and similar patterns for you. You can either do it yourself or use these tools, whichever you prefer.
Order block and Fair Value Gap (FVG) are parts of SMC trading. In order block trading, large institutions create an order block when they buy or sell at a specific price. A Fair Value Gap (FVG) occurs when institutions make a significant move in the market, creating a gap due to the sudden movement. To identify an FVG, you can read my article. If an FVG is present, it generally means that an order block will also exist.
The concept of order blocks was introduced by ICT (Inner Circle Traders). ICT (Inner Circle Trader) is a trading institute where they provide education about the stock market, with a special focus on forex trading.
Here’s a real example of trading using an order block, so you can better understand how order block trading works. Real examples always help take understanding to the next level, and for important topics like order blocks, the deeper you comprehend, the better it is for your trading success.
Order block is a very important concept in trading, and learning it is just as crucial because it helps you understand the upcoming market direction. Yes, it’s also true that no strategy works 100% in trading, and similarly, order blocks can also fail.
That’s why it’s better to consider other factors along with trading in order blocks. For example, observing FVG and identifying breakers gives more confidence when trading with order blocks.
If you want to learn more about order blocks in detail, you can contact us through the form provided below and register for our new batch.
Best of luck to everyone in trading!
