Understanding Order Blocks
An order block represents a price zone where institutional money entered the market with significant volume. These zones act as strong support or resistance because smart money has direct financial interest in defending these price levels. Trading order blocks is essentially trading at the exact zones where smart money has their positions.
Why Order Blocks Work
Order blocks are powerful because:
- They mark where institutional capital is concentrated
- Smart money will defend these prices to protect their positions
- When price returns to order blocks, smart money often re-enters
- Order blocks create natural support and resistance that hold multiple times
- They eliminate guesswork from trade location decisions
Identifying Order Blocks
Finding order blocks requires understanding price structure. Follow these steps:
- Identify the trend (higher lows = uptrend, lower highs = downtrend)
- Look for the beginning of an impulsive move (sharp price spike)
- The candle(s) at the START of this move is your order block
- Mark this zone with a horizontal line on your chart
- This becomes your future entry zone when price returns to test it
Supply vs. Demand Order Blocks
There are two types:
Demand Order Blocks (Bullish): These form at the bottom of downmoves where smart money was buying. Trade long when price returns to this zone. These are typically the most reliable order blocks.
Supply Order Blocks (Bearish): These form at the top of upmoves where smart money was selling. Trade short when price returns to this zone.
Trading Order Blocks: The Complete Setup
Here's how professional traders trade order blocks:
- Step 1: Identify multiple order blocks on your chart
- Step 2: Wait for price to move away from these zones (create distance)
- Step 3: Watch for price to approach and test the order block again
- Step 4: Enter when you see rejection candles (pins, engulfing) at the order block
- Step 5: Place stop just beyond the order block
- Step 6: Target previous swing high/low or next order block
Order Block Confirmation Signals
Don't trade EVERY touch of an order block. Wait for confirmation:
- Pin bar formation at the order block (wick rejects price)
- Engulfing candle that closes near open (indecision)
- Break of structure confirmed in your favor
- Volume increase on the rejection candle
- Fair value gap already formed within or near the order block
Order Block Strength Hierarchy
Some order blocks are stronger than others:
- Fresh Order Blocks: Recently created (last 1-3 weeks) are strongest
- Multiple-Touch Order Blocks: Order blocks tested 3+ times are strong
- Confluence Order Blocks: Order blocks that overlap with other support/resistance levels are strongest
- Aged Order Blocks: Very old order blocks (3+ months) become weaker
Real-World Order Block Trading Example
EURUSD creates a strong uptrend with higher lows. During a sharp impulse move up, we mark the beginning candle as our demand order block. Price then rallies 200 more pips and starts to consolidate. Over 3 weeks, price pulls back and re-tests the order block we marked. When price touches the order block with a pin bar formation and higher volume, we enter LONG with our stop just below the order block. Price quickly bounces up 150 pips to the next resistance.
FAQ
A: Order blocks can be tested multiple times – sometimes 3-5+ times before failing. Fresh order blocks are stronger than aged ones.
A: If price closes cleanly below a demand order block, it's invalidated. This signals smart money has abandoned this level, and we should look for the next lower order block.