The order block concept is part of the trading system or strategy developed by ICT to operate on the financial markets: the smart money concepts, or SMC. To highlight order blocks on your charts, I recommend you get to grips with TradingView as soon as possible, if you haven’t already! It will let you clearly see the order book, or the order books, that matter to you!
Here’s the syllabus of this Order Block Trading course:
Order Blocks: Why Analyze Them?!
An order block (literally a “block of orders”) reflects a specific market behavior. It signals an accumulation of buy orders and/or sell orders from financial institutions and banks. They are the ones holding the smart money, and so they are the ones expected to lead the market.
As a result, traders need to know what the smart money is doing in the market. Indeed, according to the principles developed by ICT, it is the smart money that plays the biggest part in forming the order block. It is also what sets the trigger threshold for a move!
You’ll notice that the market generally makes a sharp move, either to the upside or the downside, once the order has finished building. The effectiveness of an O.B.-based trading strategy lies in the fact that it accounts for the behavior of institutional traders.
Order Block | Definition
Financial institutions (the smart money) generally don’t act carelessly: they don’t make random, sudden investments in a trading instrument. When they want to buy or sell, they spend a lot of money on research to map out the market structure and get the best possible results. On top of that, they deal with sums of money that retail traders (small individual traders) are often unable to muster. So there’s no room for chance when it comes to placing their orders.
To avoid moving the price too sharply, the “smart money” won’t add or pull huge amounts all at once but will act in several stages. For example, if an institutional player, or whale, wants to buy $50 million worth of BTC, it will execute the buy order in three or four stages in order to get the best average price.
In the first stage, it might take, say, $15 million; in the second stage, $25 million; and in the third stage, $10 million. The price generally only makes a move once the full $50M quota has been filled.
An order block looks like a range, but not every range is an order block. What’s more, we don’t know when or where the smart money acts. So we’ll rely on the best location and the best price action to identify a suitable O.B.
Besides the order block, we need to understand what order flow is. Once price starts a move away from an order block, it produces order flow in one direction or the other. Order flow coming from a higher timeframe points to a market direction, and under this strategy we need to find the price zone that lines up with it.
Order Block Trading: Which Strategies Should You Use?!
Trading based on order blocks means focusing on the big moves, using market ranges and accumulations, and entering the market at the most opportune moment — for example, at the breakout of a range.
Basing your analysis on order blocks gives a trader a broad view of the market, which lets them cut down the number of market setups in order to anticipate better trends that can last hours or days.
Trading based on order blocks is a reliable technical-analysis method that gives a clear direction for the market’s dominant trend.
Earlier, we saw what the institutional O.B. and order flow are. In this trading strategy, you use the 1-hour to 4-hour timeframe (TF), or the Daily TF, to enter the trade, and the Weekly timeframe to identify the order flow. After that, you use Fibonacci to identify the potential level from which the market should move.
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A Concept That Applies to Crypto Too?!
I can tell you that this type of price pattern exists on the crypto markets too.
That said, personally, I don’t see it purely as an SMC concept, but as a recurring pattern possibly used by market makers and algos to get the best price when it comes to buying and selling
Timeframes
- Identifying the entry level: 1H to 4H TF.
- Measuring the order flow: Weekly TF.
Asset Pair
This trading strategy is likely to deliver profitable trades on most asset pairs.
Identifying the Order Flow
On the Weekly TF, you watch whether price is trying to make contact with an order block and whether that has produced an upward or downward move. Once that attempt is over and the move has started, all that’s left is to find the direction.
In a great many cases, you can see price rise (or fall) and then snap back toward the order block with impulsive bearish (or bullish) pressure without breaking the low (or the high). After the rejection candle, you can expect price to end up closing a candle in the opposite direction (a bullish candle if the pressure was bearish, and vice versa).
Once the candle closes, we’ve found our order flow on the Weekly.
Later, you look at the H4 or Daily timeframe: the goal is to identify the order block so you can trade in the direction of the order flow.
Order Block | Locating It
Switch to the H4 timeframe and draw the Fibonacci retracement from top to bottom. Make sure you draw it from the most recent available price, without going back beyond 200 candles. Also, for a buy trade, draw the Fibonacci going from the highest price down to the lowest price.
After drawing the Fibonacci levels, you should consider order blocks sitting below the 50% Fibonacci retracement level. Any price below the 50% Fibonacci retracement level is the discount price, and any price above the 50% retracement level is the premium price.
In a bullish order block trading strategy, you should focus on the discount price, whereas in a bearish order block trading strategy, you should only consider the premium price.
Entries
Wait for price to move above or below the order block to gain impulsive pressure to the upside or downside. Later, price will reach new highs or new lows, but it’s important to wait for it to come back to the order block. In most cases, price will return to the order block and test the 50% level before making the final move.
So if you don’t want to watch price glued to your screen, you can place a pending order at the 50% level of the order block. However, the best practice is to enter the trade at the start of the move, once it begins to move away from the order block with a candle closing above or below.
Stop-Loss and Take-Profit Levels
The stop-loss level should sit below or above the order block with some margin. In most cases, use a margin of 10 or 15 pips to avoid any unexpected market behavior.
On the other hand, the ordinary take-profit level sits around the order flow, with a risk/reward ratio of 1:1. However, the final take-profit level is the 0% Fibonacci level, which is generally the high of the available price in a bullish scenario and the low of the price in a bearish scenario.
Conclusion: My Take on the O.B. Strategy
- Identify the Weekly order flow and consider the direction.
- Identify the level of the premium and discount zones using the Fibonacci retracement levels.
- Switch to the H1 to H4 timeframe and find the order block within the 50% to 100% Fibonacci levels.
- Price should head toward the order flow directly from the order block, but it has to come back down to test the order block again 🡪 retest
- Enter the trade as soon as price rejects the order block with a reversal candle — bearish or bullish. (Don’t overlook the Japanese candlesticks.)
The order block trading strategy is profitable on most asset pairs. However, it’s essential to keep in mind that the crypto market is highly uncertain. As traders, we have to anticipate price, but the signals the market sends are never 100% certain, which is why using stop-losses is essential.
No trading strategy can guarantee a profit on every trade. Even though using order blocks is a highly profitable trading strategy, mastering the rules of trade management and risk management is a must to avoid losses caused by unexpected market conditions. For more trading courses, head over to captain-trading.com
As a reminder, you can analyze order blocks on TradingView AND browse plenty of analysis examples!
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