Here’s a step-by-step guide to finding and marking order blocks on your chart.
Step 1: Identify Key Market Movements
To find order blocks, begin by looking for significant price movements either upward or downward. These moves typically signal that institutions have executed large orders.
- Bullish Order Block: Appears before an upward surge. Look for a down candle (bearish candle) immediately preceding a bullish breakout.
- Bearish Order Block: Appears before a downward surge. Look for an up candle (bullish candle) before a bearish move.
These candles mark where institutions have positioned themselves for the upcoming move, and the price often respects these levels when revisited.
Step 2: Look for Consolidation Before the Move
Order blocks are frequently formed during periods of consolidation, small, sideways price movements before a significant breakout. This consolidation represents accumulation or distribution by institutions.
- For Bullish Order Blocks: Look for tight consolidation followed by a sharp upward breakout.
- For Bearish Order Blocks: Look for consolidation followed by a strong downward move.
These consolidations are the footprints of institutional traders building positions.
Step 3: Confirm a Sharp Breakout
Once you’ve identified a consolidation zone or a key candle, check for a breakout or breakdown that follows the block. The breakout confirms that the institutions have completed their orders, and the price is now moving in their intended direction.
- Bullish Breakout: Price surges higher, leaving the down candle (bullish order block) behind.
- Bearish Breakout: Price drops lower, leaving the up candle (bearish order block) behind.
A sharp breakout confirms that smart money has engaged the market, making the order block an area of interest for future trades.
Step 4: Mark the High and Low of the Order Block
Once the order block is identified, mark the high and low of the block’s relevant candle or consolidation area. This forms the order block zone, which will act as support or resistance when price revisits it.
- Bullish Order Block: Use the high and low of the last down candle before the bullish move.
- Bearish Order Block: Use the high and low of the last up candle before the bearish move.
These levels will be crucial for spotting future entry opportunities.
How to Trade Order Blocks
Now that you know how to find order blocks, let’s discuss how to trade them effectively. The key to trading order blocks is patience and confirmation, waiting for price to return to the order block and show signs of rejection or continuation.
Entry Strategy 1: Rejection at the Order Block
When price revisits an order block, watch for rejection patterns, such as pin bars, engulfing candles, or market structure shifts (MSS). These signals confirm that the institutions are defending their positions.
- Bullish Setup: If price revisits a bullish order block and forms a bullish rejection candle, enter a long trade.
- Bearish Setup: If price revisits a bearish order block and forms a bearish rejection candle, enter a short trade.
Stop-Loss: Place the stop-loss just beyond the order block boundary to limit risk.
Target: Aim for the next key level of support or resistance for take-profit.
Entry Strategy 2: Break and Retest
In some cases, price may break through an order block initially but return to retest it later. This provides another opportunity to trade the continuation of the trend.
- Bullish Setup: If price breaks above a bullish order block and retests it as support, enter long.
- Bearish Setup: If price breaks below a bearish order block and retests it as resistance, enter short.
This strategy ensures that the market has validated the block as a key level before you commit to the trade.
Common Mistakes to Avoid When Trading OB
- Ignoring Market Structure:
Always trade order blocks in line with the overall trend. Going against the trend increases the risk of failure. - Entering Without Confirmation:
Avoid jumping into trades without reversal patterns or confluence. Patience is essential to confirm that the block will hold. - Overlooking Higher Time Frames:
Use higher time frames (e.g., 4-hour or daily charts) to identify more reliable order blocks. Smaller time frames can generate false signals. - Overtrading:
Not every revisit to an order block will result in a profitable trade. Be selective and only trade high-probability setups.
Conclusion
Finding and trading order blocks is a critical skill for traders who want to align with institutional flows and improve their market precision. By focusing on consolidation zones, sharp breakouts, and price retests, you can identify high-probability setups that provide excellent entry points with minimal risk.
Mastering order blocks requires patience, discipline, and practice. Use the steps outlined in this guide to integrate them into your strategy, and always remember to trade with proper risk management. With time and experience, order blocks can become a powerful tool in your trading arsenal, allowing you to trade like the institutions.