Order Block Trading Strategy with Examples
In this article, I will discuss the Order Block Trading Strategy with Examples. Order Block Trading Strategy is a method that involves identifying and trading off significant price levels on a price chart. Traders using this method look for areas where large buying or selling activity has occurred in the past, potentially acting as areas of support or resistance in the future.
Order blocks can be found in any timeframe, from minutes to weeks, and can be used in any market, including stocks, futures, forex, and cryptocurrencies. Order block trading can be combined with other technical analysis methods, such as trend lines, moving averages, and oscillators, to confirm trades or to identify a potential trade setup.
Here are the general steps involved in using the order block trading method:
- Identify a price chart showing clear areas of buying or selling activity, typically a consecutive candle.
- Locate the most significant areas of buying or selling activity, often called order blocks.
- Determine whether the price will likely respect or break through the order block. This can be done by looking at the price action around the block.
- If the price is likely to respect the block, consider entering a long or short trade near the block, with a stop loss order placed just below or above the block, respectively.
Below is an example of a Nifty 50
I took this chart during the day. Here, I used a VWAP indicator along with the order block. Price reach confluence of order block and VWAP ZONE
NOW CHECK THE BELOW CHART. PRICE TURNED GREEN TO RED THAT DAY AND STARTED FALLING FROM THE TESTED ORDER BLOCK ZONE
Core Concept of Smart Money Trading Method
This concept is divided into 3 parts
SMART MONEY CONCEPT
- Supply and demand
- order block
SMART MONEY MARKET STRUCTURE
- SD FLIP
SMART MONEY ENTRY TECHNIQUE
- Liquidity hunting
Order Block Trading Strategy System
What is an Order Block in Trading?
Order Blocks are footprints left by the market when an impulsive move occurs. Order Block (OB) is the last opposite candle before the strong move that creates an imbalance in the market. Price will likely return to those zones before it triggers another impulse move to continue his trend.
Why Order Block Zone in Our Chart?
- The market continued to decline after the bearish order block zone formed, which is proof that smart money was placing sell transactions when it formed (opposite of the bullish order block zone)
- Aggressive people want to buy or sell right away. To put it another way, you place a MARKET ORDER to buy or sell anything right now at the best price currently offered.
- Your post will not be filled simultaneously because it is so large. The position will be split as the price rises quickly, but it will fill quickly, and you can enter the entire position. The price is aggressively driven up or down by aggressive market participants using their market orders.
- So, the order block zone can only be seen once the price speeds away from the zone. It indicates that there was smart money buying or selling interest at the origin of that move.
Why Does the Market Return to Untested Order Block Zones?
- The smart money position will not be filled simultaneously because it is large.
- When the order block zone was created, the smart money could not execute all its trades. If they enter the market quickly, the price moves with them. Doing this will force them to buy higher and sell lower. By keeping order blocks on the books, they find a solution to this problem.
- The smart money leaves pending orders at the order block zones so that when the market returns to the order block zone, the initial trades they were unable to complete are executed. The market moves back in the direction in which the order block zone was created. This allows the smart money to get their remaining trades placed.
- Due to a Pending Block order.
Criteria For Valid Order Block Zone Trading
- A valid demand/supply zone is where prices rapidly move away with wide candles (imbalance) and beaks of structure or character changes. So, three important factors to study to find a valid zone
- Liquidity hunting at order block zone. IN THE FORM OF Stop Hunt Candle / Fake out/candle trap OR PSY
- Imbalances move or sharp move in a short time SRC/AR CANDLE MUST (MOVE AFTRE ORDERBLOCK).
- beaks of structure/ changes of character (form 1 of 3 market structure)
- untested order block zone FOR entry
Liquidity hunting at order block zone. IN THE FORM OF Stop Hunt Candle / Fake out/candle trap. I will cover this concept in more detail later.
Imbalance moves after the order block zone.
An imbalance is a significant difference between the number of buy orders and sale orders for a particular security or asset. This can occur when there is a large amount of buying or selling pressure in the market, which can cause the security price to move rapidly in one direction.
- Momentum should increase. suggest an imbalance in price
- Order block zone should not test the next 3 candles, and also, in a bullish order block, the previous candle low should not breach in the next 3 candle
The above example shows price imbalance with 3 consecutive candles making a higher high and higher low. Now check the below example of price in balance. Here, after 2 candle prices form a balanced structure.
BELOW IS AN EXAMPLE OF THE NIFTY 50 CHART
Volume in Order Block Zone Trading Strategy
A higher volume at a particular level could indicate stronger support or resistance.
- Either high-volume block candle and follow-through
- Or follow-through volume increasing after block candle formed
In the first example, the high volume order block candle wands in 2nd example low volume order block, but the volume increases. Both cases are valid to order block.
BELOW IS THE CHART OF THE SAME NIFTY50 WITH THE VOLUME
Order Block move should Break the Market Structure
BEFORE going forward, understand valid breakout vs invalid breakout
Untested order block for entry
Prefer only untested OB zone
What is the Order Block Trading Strategy?
The Order Block Trading Strategy is a concept that originates from institutional trading. An “order block” in financial markets refers to many securities traded by institutional investors like banks, hedge funds, and other large entities. The strategy stems from the idea that these large trades can significantly influence an asset’s price. By identifying these zones where institutional traders have placed their orders, a retail trader might be able to predict price movements and align their trades with the big money. Here is an overview of how you might implement an Order Block Trading Strategy:
Identification of Order Blocks:
- Higher Time Frame Analysis: Start by looking at higher time frame charts, such as the daily, weekly, or monthly charts, to identify significant price levels where there was a strong move away from. These levels are often where institutional orders were believed to be placed.
- Consolidation Zones: Before a strong move, the price usually consolidates. These consolidation zones preceding a large candle or series of candles can signal the presence of order blocks.
- Last High/Low before Breakout: Identify the last bearish candle before a bullish price move or the last bullish candle before a bearish move. These candles can represent the area where institutional orders were absorbed.
Trading Using Order Blocks:
- Retest of the Order Block: Once an order block has been identified, wait for the price to return and retest this area. This is where traders expect institutions will be interested in entering the market again.
- Confirm with Price Action: Use candlestick patterns, such as pin bars, engulfing candles, or dojis, at the order block level for entry confirmation.
- Volume Confirmation: Increased volume at the order block level can confirm the presence of institutional interest.
- Stop-Loss Placement: Place stop losses just beyond the order block zone to minimize the risk if the market does not respond to the order block as anticipated.
- Position Sizing: Adjust your position size to ensure that if your stop loss is hit, you only lose a small percentage of your trading capital.
- Market Context: Be aware of the overall market trend and other technical indicators that may affect the price movement.
- Fundamentals: Understand that order blocks can be disrupted by significant fundamental news or events, so stay informed about market news.
- Sentiment Analysis: Consider the market sentiment, as it can sometimes precede the actions of institutional traders.
- Identifying true order blocks requires practice and can often be subjective.
- Institutional traders may change their strategies, rendering previous order blocks ineffective.
- Retail traders do not have access to the same information as institutional traders, so this strategy involves a degree of speculation.
Tools and Indicators:
- Support and Resistance Levels: Helps in identifying potential order block zones.
- Volume Indicators: To confirm the presence of institutional activity.
- Moving Averages: To determine the overall trend direction.
Backtesting and Adaptation:
- It’s crucial to backtest this strategy on historical data to see how it would have performed in the past. Moreover, adapting the strategy based on changing market conditions and personal trading experience is important.
The Order Block Trading Strategy is an approach that attempts to leverage the significant price levels where institutional traders are believed to have placed their orders. It requires careful analysis, a good understanding of market structure, and a solid risk management plan. As with any trading strategy, there is no guarantee of success, and using this as part of a broader trading plan is recommended.
Order Block Trading Strategy Summary:
The Order Block trading strategy is a technical analysis approach traders use in financial markets, particularly in Forex trading. This strategy aims to identify key support and resistance levels on price charts, known as “order blocks,” and use them as potential entry or exit points for trades. The concept is based on the idea that significant buying or selling activity occurs at these levels, which can influence future price movements.
Here are the basic steps to implement an Order Block trading strategy:
- Identify Support and Resistance Levels: Analyze price charts for significant support and resistance levels. Previous swing highs, lows, and other technical indicators like Fibonacci retracement levels often form these levels.
- Locate Order Blocks: Once you’ve identified support and resistance levels, look for what traders call “order blocks.” These are price areas where significant buying or selling activity occurred in the past. They are typically marked by sharp price movements and strong candlestick patterns, such as engulfing candles or pin bars.
- Confirm Order Blocks: It’s essential to confirm the validity of the order blocks. You can do this by looking for factors such as volume spikes, confluence with other technical indicators (e.g., moving averages, trendlines), and the overall market context.
- Trade Entry: When you’ve identified a confirmed order block, consider it a potential trade entry point. Traders often use limit orders to enter positions at or near these levels. The idea is to enter a trade when the price revisits the order block, expecting a reaction from market participants.
- Set Stop-Loss and Take-Profit Levels: Always use risk management techniques. Set a stop-loss order to limit potential losses if the trade goes against you. Additionally, determine a take-profit level based on your risk-reward ratio and the expected price movement from the order block.
- Monitor the Trade: Keep a close eye on the trade once it’s active. Watch for price action around the order block and adjust your stop-loss and take-profit levels as necessary.
- Exit the Trade: Exit the trade when the price reaches your predefined take-profit level or if the trade shows signs of reversal or weakness. Don’t forget to follow your trading plan and avoid emotional decision-making.
- Review and Learn: After each trade, review your results and analyze what went well and what didn’t. This will help you refine your Order Block trading strategy over time.
In the next article, I will discuss the Smart Money Market Structure Trading Strategy. In this article, I try to explain the Order Block Trading Strategy with Examples. I hope you enjoy this Order Block Trading Strategy article. Please join my Telegram Channel. YouTube Channel and Facebook Group to learn more and clear your doubts. Please watch the following video to learn and understand this concept better.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.