What Are Order Blocks?

Order blocks are specific areas on a price chart where significant trading activity has occurred, typically initiated by institutional traders. These zones often become important support and resistance levels in future price action.

Types of Order Blocks

Bullish Order Blocks

Bullish order blocks form during downward movements and often lead to upward reversals. Key characteristics include:

  1. Strong momentum candle down
  2. Last bearish candle before reversal
  3. Often accompanied by high volume
  4. Clean break of structure above

Bearish Order Blocks

Bearish order blocks form during upward movements and often lead to downward reversals. They feature:

  1. Strong momentum candle up
  2. Last bullish candle before reversal
  3. Usually shows high volume
  4. Clean break of structure below

How to Identify Valid Order Blocks

Key Components

  1. Momentum: Look for strong momentum candles
  2. Volume: Higher than average volume often confirms significance
  3. Clean Break: Price should show a clean break away from the zone
  4. Return to Zone: Price should eventually return to test the level

Validation Criteria

  • Minimum size requirements
  • Clear price rejection
  • Multiple timeframe confluence
  • Clean market structure

Trading Order Blocks

Entry Strategies

  1. Direct Zone Test

    • Wait for price to return to order block
    • Look for rejection candlesticks
    • Enter on confirmation signals

  2. Break and Retest

    • Wait for break of nearby structure
    • Enter on retest of order block
    • Use tight stop loss

Risk Management

  1. Stop Loss Placement

    • Beyond the order block
    • Account for market volatility
    • Consider timeframe context

  2. Take Profit Targets

    • Previous swing points
    • Key support/resistance levels
    • Risk-reward based exits

Common Mistakes

  1. Trading every order block
  2. Ignoring market context
  3. Poor stop loss placement
  4. Missing confirmation signals

Advanced Order Block Concepts

Mitigation

Order block mitigation occurs when price returns to an order block level. Understanding mitigation helps:

  1. Predict potential reversals
  2. Identify failed patterns
  3. Adjust trading strategies

Internal Market Structure

Order blocks often contain important internal structure:

  1. Fair value gaps
  2. Liquidity voids
  3. Price inefficiencies

Integration with Other Concepts

Support and Resistance

Order blocks often align with:

  1. Traditional S/R levels
  2. Trend lines
  3. Moving averages
  4. Fibonacci levels

Volume Analysis

Combining order blocks with volume provides:

  1. Better confirmation
  2. Higher probability setups
  3. More precise entries

Conclusion

Order blocks are powerful technical analysis tools that help traders understand market structure and institutional trading activity. By mastering order block analysis, traders can better identify high-probability trading opportunities and manage risk effectively.

Remember to always validate order blocks with additional technical analysis tools and maintain proper risk management practices.